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Sainsbury's and Argos were unlikely bedfellows, but partnership looks to be working - at least for Argos!

John Ibbotson, director of the retail consultancy Retail Vision, commented: “What began as a bolt-on has turned into a lifeboat. For the embattled Sainsbury’s, the Argos acquisition is looking more inspired by the day”
Argos store
But, he added: "Sainsbury’s must get its core business in order before it comes off its catalogue crutches”

Argos and Sainsbury may not have looked “the most natural of bedfellows” when the supermarket giant took over the high street catalogue-based retailer last year, but the early signs are that the partnership is working – at least for Argos!

Full-year results from J Sainsbury plc (LON:SBRY) today saw group sales jump by 12.7% to £29.112bn, up from £25.829bn a year earlier, helped by a 4.1% boost in sales at Argos, which was acquired with the takeover of Home Retail Group

However, the strong Argos performance again masked a weak showing from Sainsbury’s core supermarkets business, which saw like-for-like sales, excluding fuel, falling by 0.6%, albeit a slowing from a 0.9% decline in the previous year.

WATCH: Sainsbury's results 'not terribly impressive' - ETX Capital's Neil Wilson

READ: Sainsbury's weak as supermarkets sales continue to decline

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John Ibbotson, director of the retail consultancy Retail Vision, commented: “What began as a bolt-on has turned into a lifeboat. For the embattled Sainsbury’s, the Argos acquisition is looking more inspired by the day.”

He added: “Incorporating the catalogue brand initially swallowed time and resources – but it has begun paying dividends that flatter these otherwise insipid results and could prove crucial in future.”

Ibbotson said: “The brand’s much-vaunted turnaround plan has been slower to show results than those of its rivals, who have successfully staunched their losses with aggressive price cuts and structural reforms.”

He concluded: “Argos has so far proved an effective ‘get out of jail' card for Sainsbury’s. But with inflation biting into consumer spending and the latest retail sales figures showing that the consumption boom is waning, Sainsbury’s must get its core business in order before it comes off its catalogue crutches.”

Sainsbury’s share price drops 4.5%

Sainsbury’s share price reflected those concerns, with the FTSE 100-listed stock the top FTSE 100 faller today, down 5.6%, or 15.5p at 264.0p.

Chris Beauchamp, chief market analyst at IG, pointed out that Sainsbury’s shares “touched a 52-week high yesterday, so the weakness today makes sense when viewed in the light of profit-taking and worries about a tougher environment in the months ahead.”

He added: “The trick is still to make the Argos acquisition work, and in this it makes sense for the group to keep forging ahead with its integration efforts.”

WATCH: Zak Mir on Sainsbury's

The group opened 59 Argos Digital stores in Sainsbury's supermarkets over the year to March 11 2017 and said they were performing well.

The firm is also accelerating its plan to open a total of 250 Argos Digital stores in Sainsbury's supermarkets and will deliver its £160mln underlying earnings (EBITDA) synergy target by March 2019, six months ahead of schedule.

Cross-selling opportunities are harder to quantify

Neil Wilson, senior market analyst at ETX Capital noted: “Cross-selling opportunities are harder to quantify but should contribute to sales growth as more Argos stores are integrated with Sainsbury’s supermarkets.”

But, he added: “One concern about Argos is that it sources a lot of goods from abroad and the depreciation in the sterling exchange rate could wipe out cost synergies from real estate and store integration”.

Aside from the takeover cost synergies, Sainsbury’s also said it was on track to deliver its three-year, £500mln cost saving programme by the end of 2017/18, with a further £500mln cost savings target set over three years from 2018/19.

This all comes as the group said its core grocery market is staying competitive, with the impact of cost price pressures remaining uncertain.

The latest grocery market share figures from Kantar Worldpanel, also released today, did show all 10 major food retailers in growth for the first time in three-and-a-half years, but that was thanks to an Easter sugar rush for eggs and hot cross buns.

The data revealed that Sainsbury’s sales rose 1.7% in the period, its biggest increase since June 2014, but still slower than market leader Tesco PLC’s (LON:TSCO) growth of 1.9%, and William Morrison Supermarket PLC’s 2.2% growth.

READ: Easter sugar rush: Kantar Worldpanel data

George Salmon, equity analyst at Hargreaves Lansdown pointed out: “Sainsbury’s ‘bread and butter’ remains its bread and butter grocery business.

“Discounters like Aldi and Lidl are still making gains at the expense of the UK’s more established names, forcing prices downwards across the board. This may be great for the consumer, but it’s pretty ugly for the supermarkets.”

Salmon concluded: “Unlike its domestic rivals Tesco and Morrison, like-for-like sales at Sainsbury have remained stubbornly negative recently. Lower prices, weaker margins and a falling market share? Not a good combination.”

 -- Updates share price --

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