Investors who questioned the wisdom of Sainsbury’s £1.4bn deal for Home Retail last year are likely to have changed their tune as growing Argos sales propped up weaker grocery numbers for the supermarket this week.
Like-for-like sales fell 0.5% at the supermarket in its fourth quarter, including a 4% slump in general merchandise. But Argos came to the rescue with 4.3% like-for-like growth in the nine weeks to 11 March to bump up combined like-for-like sales 0.3% for the period.
John Ibbotson of Retail Vision commented: “While the acquisition of the catalogue brand initially swallowed time and resources, it is now paying dividends for Sainsbury’s”. Argos smashed consensus predictions of 2% like-for-like growth in the period, but a cautious HSBC noted: “Argos has benefited from consumers bringing some purchases forward ahead of expected price rises later in the year. Through 2017, we expect life to get tougher for Argos and consumers.”
Argos’ performance was not enough to stop a 1.6% slide in Sainsbury’s share price by lunchtime on Thursday, back to 267p. Sainsbury’s was keen to point out the negative impact of the later timing of Mother’s Day and Easter compared with the previous period. It said without this sales would have been flat, but that still represents a sales volume decline as inflation returns to the market.
HSBC concluded: “We can see continued pressure on the core estate as Tesco continues to win volume, as Asda stems its sales losses and as Morrisons continues its transition from weak retailing to good retailing.”
Bernstein noted CEO Mike Coupe’s cautious outlook, which “provides no reassurance to investors” as Coupe warned “the impact of cost price pressures remains uncertain”.
Despite the share price dip, Sainsbury’s shares remain 7.1% up since the turn of the year.
Also under pressure this week was Ocado. It posted a solid if unspectacular first quarter trading update, with the same rate of retail sales growth (13.1%) as the previous quarter amid another drop in average order size. Shore Capital called the growth “a healthy number in most markets, albeit not shooting the lights out”, while investor worries persist that Ocado is still giving no material updates on its first international partnership. Bernstein explained: “The technology part of the business trades at tech company style multiples, yet Ocado would need to sign one deal per year to justify those multiples.” The shares rose on Tuesday, but ended the day down 0.8% at 256.2p and were 3.3% down from Monday’s close price by Thursday at 249.8p.