Argos lends a helping hand
Sainsbury shares jumped by over 6% after its third quarter trading update, which covers the all-important Christmas period. Trends at both Argos and Sainsbury are improving, with continued strong growth in online sales.
Following the £1.4bn acquisition of Home Retail, the big issue for Sainsbury is the integration of Argos. With over £4bn of sales in 2015, offering Sainsbury the chance to increase its exposure to the non-food market.
In its last update as part of the Home Retail Group, Argos delivered like-for-likes of just 0.1%. Fast forward seven months and that figure has reached 4%. So while it remains early days yet, there are certainly positive signs.
There are already 30 Argos digital stores in Sainsbury supermarkets, with the longer term plan being for the bigger shops to swallow up nearby Argos stores. The savings from this store-within-a-store model should hit £75m a year, as part of total savings of £500m p.a by 2017/18.
The integration has other benefits too. Argos' delivery network could also benefit the group's online offering, and, as awareness grows of where Argos stores have disappeared to, it could drive footfall to the group's superstores. Sainsbury's Bank can refinance Argos' loan book to release around £800m, so the cash cost of the takeover is minimal.
On paper then, the deal looks reasonable. However, both businesses also have long-standing problems to deal with. Home Retail has struggled to compete with the likes of Amazon, while Sainsbury, like all of the large UK supermarkets, has come under pressure from price deflation. Dealing with the fall in sterling, which will raise the cost of imported goods, brings another challenge.
Sainsbury's CEO Mike Coupe clearly sees the challenges presented by the deal, and has described it as a career defining moment. It remains to be seen whether his multi-product, multi-channel strategy will turn two negatives into a positive. If it does, it will be a masterstroke.
In the meantime, the shares offer a prospective yield of over 4% and are on a PE of c. 13 times expected earnings.
Third Quarter trading in detail:
Combined Sainsbury's and Argos like-for-like (LFL) sales rose 1% (excl. fuel) with Sainsbury rising 0.1% and Argos increasing by 4.0%.
The return to LFL growth at Sainsbury was driven by the online and convenience divisions, which grew sales by 9% and 6% respectively. Clothing also had a strong quarter, up 10% on last year.
Argos delivered a strong quarter overall, with growth across technology, toys, sports and gifts. With high demand for the group's Black Friday offers, web sales rose by 13% over Q3. 57% of Argos sales are now placed online.
Mike Coupe, CEO said "the market remains very competitive and the impact of the devaluation of sterling remains uncertain. However, we are well placed to navigate the external environment and remain focused on delivering our strategy."
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