There were some raised eyebrows when J Sainsbury PLC (LON:SBRY) snapped up Argos’ parent Home Retail for £1.4bn almost two years ago now.
Some in the City speculated that the UK’s second-largest supermarket might find the transaction difficult to make work from a logistics point of view, while others felt the price tag was expensive.
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But the latest quarterly sales figures from Sainsbury’s show just how important Argos is becoming.
Fierce sector competition is pressuring groceries, sales of which rose just 0.5% in the latest quarter – a sharp downturn from the 3.0% it posted in the same period last year.
Much of that can be explained by the £150mln ‘price investment’ – cost cutting, to you and me – which management introduced to keep shoppers coming through the door.
Clothing sales growth are hardly strong either, which puts a lot of pressure on Argos to pick up the slack.
Argos taking the pressure off groceries
After three consecutive quarters of sales declines, the catalogue retailer looks to finally be doing just that, outperforming a “very challenging market”. Sales jumped 1.7% in the quarter, much better than the 0.7% fall analysts had been forecasting.
Sales were boosted by 37 new Argos stores opening within Sainsbury’s supermarkets taking the total to 84, while its online offering continues to gain traction.
With another 200-or-so more stores to open in Sainsbury’s supermarkets, there’s still the potential for more to come.
The recent closures of Maplins, Toys R Us and Tesco Direct is also likely to bring some more business Argos’ way over the coming months.
Argos’ upturn will give confidence to shareholders that the board could be right again with the Asda merger.
That deal is still with the regulators but analysts expect it to be waved through, with Barclays claiming there is an 80% chance of the Competitions and Markets Authority approving the tie-up.
“With gross cost synergies of c.£1.3bn, Sainsbury's has £700mln-£800mln firepower to invest in the customer - enough to cut prices by c.250bps (basis points),” wrote UBS analysts earlier this week.
Asda a 'natural home' for Argos
Alongside the savings, the merger will give Sainsbury’s bigger buying power which should also improve margins.
Having Asda and Argos in the same stable could also throw up some more, perhaps unexpected, benefits.
UBS’s own research has suggested that Asda shoppers are the heaviest Argos 'cross-shoppers' of any UK grocer and analysts have called the US-owned supermarket chain a ‘natural home’ for Argos.
“Could it be that a two-pronged ASDA/Argos strategy changes Sainsbury’s fortunes?” asked Accendo Markets head of research Mike van Dulken.
Sainsbury’s shares were up 1.7% to 323.9p on Wednesday morning.