Argos deal lifts Sainsbury’s


Daniel Lane - Fidelity Personal Investing

8 November 2018

Half-year underlying profits jumped 20% to £302m at Sainsbury’s, with the UK’s second-largest supermarket specifically highlighting the value its Argos stores have added to the company’s bottom line.

But while the Argos element has driven “an increase in trading activity” according to the retailer, costs associated with restructuring, integrating Argos and lining up the proposed Asda merger mean Sainsbury’s pre-tax profits fell to £132m, compared with £220m a year earlier.

Like-for-like sales growth for the 28 weeks to the end of September came in at 0.6%, below analyst expectations, taking the shine off headline profit growth.

This morning’s results come hot on the heels of similar updates this week from Marks & Spencer and Wm Morrison. A quick look at the peer group gives a clear picture of the difficulties across the board.

Like Sainsbury’s, Morrison’s supermarket chain missed analyst expectations, reporting growth of 1.3% rather than the 1.8% analysts had in mind, drawing on levels achieved in the first quarter. The wholesale business picked up the slack though, growing by 4.3%, meaning sales in the third quarter rose 5.6%.

And M&S chief executive Steve Rowe certainly wasn’t behind the door in laying out the problems at the core of the UK stalwart. The retail boss said the company was “Silo-ed and hierarchical” and pointed to a range of areas that needed immediate attention, not least food sales, which fell 2.9% in the six months to the end of September.

But behind the doom and gloom, perhaps the most interesting aspect is how the firms are planning to tackle the malaise. It’s easy to point out the problems but, for investors in the space, well-executed turnaround plans can make the difference between a value opportunity and a value trap.

Fixing a wonky trolley

Sainsbury’s acquisition of Argos looks to be a long-term bet on attracting greater footfall and reducing costs across the businesses. If the Asda merger gets the go-ahead, there could be even greater savings ahead.

For Morrison’s the future means continuing to put products in other stores after boss David Potts beefed up the retailer’s wholesale division with its Safeway brand, and franchise and supply partnerships with Sandpiper CI, the largest retailer in the Channel Islands. The retailer has also started to supply products to Thai grocer Big C and MPK Garage, as well as selling its products through Amazon and McColl’s convenience stores.

Under Potts, Morrison’s has focused on bolstering the balance sheet, revamping its stores, improving its customer service and increasing overall efficiency. Its Ocado partnership is a clear signal that tech-focused distribution is firmly on their radar too.

For M&S, the task looks a bit more daunting but Rowe’s admittance that the firm has drifted in recent years is a very necessary first step. Trimming down the store count, with fewer, larger clothing and homeware stores in better locations planned is one of the top priorities. The iconic retailer will have to address its internet presence, management, cost-base and international business quickly and efficiently to stave off increasing competition from all sides, including the German discounters.

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