Argos acquisition takes sting out of Sainsbury’s sales slip

Added 28th September 2016

Although Sainsbury’s posted a 0.4% decline in total retail sales, Argos was able to weather the tough retail environment, giving investors hope for Sainsbury’s new growth initiatives.

Argos acquisition takes sting out of Sainsbury’s sales slip

Food price deflation pushed the UK supermarket’s second quarter like-for-like sales, excluding fuel, down by 1.1%. This represents the second consecutive quarter of declining sales for Sainsbury’s, which also posted negative sales (0.9%) the previous financial year.

Shares in the company fell 3.1% Wednesday morning, making it the top FTSE 100 faller at the time of writing. Rivals Tesco and Morrisons were both trading slightly up by 0.68% and 0.64%, respectively, within the same timeframe.

"It's not surprising to see Sainsbury's come in lower than expected,” Cavendish fund manager Paul Mumford said. “Food retailers do a lot of on-the-spot purchasing and so are feeling the immediate impact of Sterling weakness in what is already an intensely competitive marketplace, characterised by razor-thin margins. Between this and the living wage, the big supermarkets are all going to be squeezed in the coming years.”

Despite the retailer’s continued sales slump, Helal Miah, investment research analyst at The Share Centre, found the results “encouraging” overall. 

“There was good transaction and volume growth but the continued level of intense competition in the sector still led to a drop in revenues, falling by more than the 0.8% in the first quarter,” Miah said. “However, overall performance was better than the market’s expectations. The online business continues to see good growth rates, with orders up by 12%, but sales rose by just 8% reflecting that price deflation is affecting this side of the business as well.”

Commentators were also impressed by the sales performance of the Argos’ Home Retail Group, which Sainsbury’s acquired on 2 September 2016 as part of a multi-product, multi-channel initiative with Argos and Habitat. Argos posted total sales growth of 3.0% in the 13 weeks to 27 August and like-for-like sales growth of 2.3%.

“This is especially impressive considering the retailing environment is a tough market,” Miah commented. “Some 15 or so Argos Digital outlets have already been opened in Sainsbury’s stores and a further 200 new digital collection points will be opened by the end of the year.”

“We continue to prefer Sainsbury’s over its FTSE 100 rivals, Tesco and Morrisons, as we believe it is better positioned to withstand the discounters,” he continued. “It is working on fending off the competition and the integration of Argos will hopefully bring in shoppers who want a range of services under one roof. It pays an attractive dividend yield and we continue to recommend it as a ‘buy’ for investors seeking income and growth prospects who are willing to accept a medium level of risk.”

Mumford, on the other hand, thinks investing in the general retail sector is a safer bet than the food specific retailers, given the recent sterling depreciation.

"There's more cheer to be found in the general retail sector, where businesses are far more able to insulate themselves against the Sterling fall,” he argued. “Where firms have a solid offering, they are doing well - such as we saw with BooHoo's results yesterday and Moss Bros' today."






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