J Sainsbury’s Total fourth quarter like-for-like sales were 0.3% higher but strip out Argos and the figures tell a less compelling story.
In a trading update for the nine weeks to 11 March 2017, the company reported a 0.5% like-for-like sales decline in its struggling core supermarket business, excluding fuel sales.
Total retail sales, excluding fuel, dropped 1.4%. Including fuel, total retail sales fell 0.3% but rose 0.3% on a like-for-like basis. Sainsbury’s attributed some of the sales decline to Mother’s Day and Easter being placed later in the year.
But the main hurdle for Sainsbury’s and its ‘Big Four’ supermarket peers - Tesco, Morrison Supermarkets and Asda – is that it is continuing to lose market share to discounters Aldi and Lidl.
The fierce competition from smaller rivals has prompted supermarkets to engage in a pricing war, but this has become more difficult in recent months as import costs rise due to a weaker pound following last June’s Brexit vote.
Sainsbury’s chief executive Mike Coupe seemed to realise things weren’t getting any better for supermarkets and last year decided to buy Home Retail Group, which owns catalogue retailer, Argos, and household furnishings retailer, Habitat.
The acquisition of struggling Argos, completed last September, could have meant make or break for Sainsbury’s.
So far the move has paid off. In the fourth quarter Argos delivered a 4.3% increase in like-for-like sales and Total sales gain of 3.8%. The growth was driven by sales of mobile phones, video gaming, wearable technology and sports equipment.
Following the successful integration of Argos, Sainsbury’s has opened a further 11 stores in its supermarkets, bringing the Total to 41. It also opened another Habitat store in a Sainsbury’s supermarket, taking the Total to eight.
“With Argos numbers again the highlight of results, Mr Coupe will no doubt feel vindicated in his decision so far,” said George Salmon, equity analyst at Hargreaves Lansdown.
“However, an uncertain outlook on the foods business means the champagne will have to stay on ice for a while yet.”
Watch: City Index's Ken Odeluga 'concerned by clear deterioration' in Sainsbury's food sales
Strategic worries…
Neil Wilson, senior market analyst at ETX Capital, said Sainsbury’s will need to consider where its core grocery business is headed as it looks to be increasingly propped up by its clothing division and Argos.
The group’s clothing brand Tu achieved a 5% increase in sales during the fourth quarter.
Wilson also noted chief rivals Tesco and Morrisons have been delivering healthier sales growth in food on the back of restructuring efforts.
A report from Kantar Worldpanel earlier this month showed Sainsbury’s sales rose 0.3% in the 12 weeks to 29 January.
However, Morrison’s came out on top with sales rising 2.6%, the fastest growth in five years.
Tesco sales rose 0.6%, a sixth period of growth in a row, while Asda saw a 0.8% decline.
“On the one side it’s got discounters like Aldi and Lidl smashing prices down and stealing market share, while Tesco and Morrisons are in the middle of strong turnaround programmes that leave Sainsbury’s trailing,” Wilson said.
Outlook...
Wilson added: “It will be tough going for Sainsbury’s in 2017 as in addition to tough competition it must contend with all the sector-wide problems like falling margins and the sterling squeeze from suppliers. Falling margins and profits don’t look great when the market is growing.”
The analyst believes Argos may be Sainsbury’s saving grace. With Argos, he said Sainsbury’s can develop a multi-channel offering that could trump its rivals.
While Argos posted an impressive sales rise in the last quarter, Wilson wondered how long this pace of growth can be maintained.
“Argos sources a lot of its goods from abroad and the impact of weaker sterling could wipe out cost synergies from real estate and store integration.”
Sainsbury’s chief executive Coupe conceded the market remains competitive and the impact of cost price pressures remains uncertain. But he thinks Sainsbury's is well placed to "navigate the external environment" and the group remains focused on delivering its strategy.
David Stoddart, analyst at Edison Investment Research, said: "The group argues that it is well placed to weather the very competitive environment and emerging cost price pressures but Sainsbury’s performance is hardly compelling evidence of that.”