Argos has been the main driver for refocused retail giant J Sainsbury plc (LON:SBRY) since the acquisition of the catalogue-based high street stores group last year but today’s trading statement also showed a brighter performance from the group’s grocery core though challenges remain.
The FTSE 100-listed firm’s latest update was the first to combine Argos sales into the overall figures rather than splitting them out separately as they have before.
And Sainsbury’s surprised the market with an increase in first-quarter like for like sales, excluding fuel, of 2.3%, exceeding analysts’ expectations for a 1.9% rise.
READ: Sainsbury's rises as first quarter trading beats forecasts, with grocery sales picking up
Jordan Hiscott, chief trader at ayondo markets said: “This is particularly impressive considering price pressure amongst the UK top supermarkets has been increasing, as wage pressure filters through to consumer spending. The jump in popularity of own brand food items in the last two quarters is testament to this.”
In today’s statement, Mike Coupe, Sainsbury’s group chief executive, said: “We have seen strong food sales where we have invested in product innovation, such as our new Summer eating ranges.”
Coupe also added: "General Merchandise and Clothing, including Argos, outperformed the market, with Fast Track delivery and collection seeing a stellar performance during the quarter, particularly during the period of warm weather when customers wanted to buy and receive their products the same day.”
Electric fans and paddling pools
Laith Khalaf, senior analyst at Hargreaves Lansdown pointed out that the recent heatwave helped to boost Sainsbury’s sales “as customers turned to the Argos website to buy electric fans and paddling pools to keep cool in the hot weather.”
He continued: “Sales also rose at the supermarket checkouts, though with the cost of food imports rising because of weaker sterling, it remains to be seen how much of this will feed through into profits.”
Neil Wilson, senior market analyst at ETX Capital, added: “A better performance from Sainsbury’s now it is reporting Argos within the like-for-like sales comparisons, although it is hard to tell from these numbers how the core supermarket is doing on a LFL basis.”
He added: “The grocery transaction growth suggests the LFL sales figure is improving but there is caution about margins with Sainsbury’s noting it has ‘improved its price position’ as inflation is rising.
“Retail underlying operating margin declined by 32 basis points to 2.42% last year. Rising inflation and a battle for market share are not likely to make that improve.”
Wilson pointed out that the “supermarket is pulling a bit more weight but Argos is still doing the heavy lifting.”
He said: “The concern is that the acquisition is taking management’s eye of the ball a little when it comes to delivering on the core supermarket offering at a time of intense competition.”
Bigger picture still a challenging one
Hargreaves’ Khalaf agreed, saying: “The bigger picture is still a challenging one for the UK supermarkets.“
And he pointed out that “the turf war the big supermarkets have been fighting against the discounters may start to look like a schoolyard skirmish if Amazon decides it wants a piece of the UK grocery market. “
Amazon.com Inc ‘s(NASDAQ:AMZN) Amazon Fresh service is already being trialled in the UK, and the online retail giant’s recent purchase of Whole Foods Markets Inc (NASDAQ:WFM) sent shock waves through the supermarket sector.
Khalaf said Sainsbury’s purchase of Argos looks to be delivering results, and the supermarket is reportedly in talks to buy the convenience chain NISA to try to broaden its footprint, no doubt at least in part a response to Tesco PLC’s (LON:TSCO) proposed takeover of wholesaler Booker PLC (LON:BOK) and its network of franchised convenience stores.
But he concluded: “While all this recovery, refocusing and reinvention goes on, investors have to accept there’s still a lot of uncertainty in the UK supermarket sector.”