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Sainsbury - Argos lifting sales

George Salmon | 16 March 2017 | A A A
Sainsbury - Argos lifting sales

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Sainsbury (J) plc Ordinary 28,4/7p

Sell: 201.60 | Buy: 201.80 | Change 0.00 (0.00%)
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Another positive contribution from Argos more than offset the declines in General Merchandise caused by the absence of Mother's Day and Easter from Q4 this year and helped Sainsbury to a 0.3% overall improvement in like-for-like (LFL) sales during the quarter.

However, the group's cautious outlook suggests a challenging external environment in the near future. The shares dipped 2% on the news.

Our View

Following the £1.4bn acquisition of Home Retail, the main focus for Sainsbury is the integration of Argos. With over £4bn of sales in 2015, Argos offers 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 nine months and that figure has topped 4%. So while it remains early days yet, there are certainly positive signs.

There are already 41 Argos 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 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. Argos 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 3.7%%, and trade at around 13.7 times expected earnings.

Fourth quarter trading statement:

In the nine weeks to 11 March 2017, the combined Argos and Sainsbury group has delivered LFL sales growth of 0.3% (excluding fuel). This increase has been driven by a 4.3% rise in LFLs at Argos, while like-for-likes at Sainsbury fell 0.5%. The absence of both Mother's Day and Easter from Q4 this year held back General Merchandise sales.

Within Sainsbury's retail, the online and convenience businesses continue to deliver growth, with online orders up 8% and total convenience sales almost 7% higher. General Merchandise sales were 4% down, held back by this year's later Mother's day and Easter.

In the fourth quarter, the group opened a further 10 convenience stores, bringing net openings for the year to 33. With another superstore opened in Q4, a net 3 new stores were opened over the year.

Looking ahead, Mike Coupe, Sainsbury CEO said "the market remains very competitive and the impact of cost price pressures remains uncertain. However, we are well placed to navigate the external environment and remain focused on delivering our strategy."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.