Sainsbury's fourth quarter sales saved by Argos growth

Sainsbury’s like-for-like retail revenue fell in the fourth quarter but total group sales rose thanks to a strong showing from Argos.

Sainsbury's retail revenue for the quarter ended 11 March was up 0.1%, excluding fuel sales, compared to last year, but LFL retail revenue fell 0.5%.

The supermarket's results were saved from a 3.8% increase in sales and a 4.3% increase in LFL revenue from Argos, which drove total group LFL revenue up 0.3%, excluding fuel.

This was slightly better than HSBC's forecast as it had expected the FTSE 100 company to report flat retail LFL revenue after Nielsen data showed the grocery market endured a weak January and a slightly better February. It had also expected a 1% fall in LFL group sales and LFL growth of 2% for Argos.

The FTSE 100 company’s Tu clothing brand performed ahead of the expectations with sales up 5%.

Chief executive Mike Coupe said that Argos delivered another "strong quarter" of growth and the company is investing in digital services to enhance Argos’ website and app.

He said that Sainsbury's Bank continued to deliver good growth and its personal loan offers sold well in the fourth quarter.

"The market remains very competitive and the impact of cost price pressures remains uncertain. However, we are well placed to navigate the external environment and remain focused on delivering our strategy,” Coupe said.

Neil Wilson, senior market analyst at ETX Capital, said that investors will have to consider where the core grocery business is headed when it increasingly looks like it is being propped up by clothing and Argos.

He said that Sainsbury's is facing a huge squeeze from Lidl and Aldi, which are growing sales at a rate of 13% and lowering prices, while chief rivals Tesco and Morrisons are delivering healthier sales growth and are in the middle of strong turnaround programmes that has left Sainsbury’s trailing.

“Sainsbury’s did very well when Tesco and others were struggling but is now facing its own challenges. 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.”

Wilson also questioned how long Argos’ growth can be maintained and that it “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”.

George Salmon, equity analyst at Hargreaves Lansdown said that Coupe's acquisition of Argos appeared to be vindicated on Thursday as there were "doubts about the merits of bringing the floundering Argos business on board", and even Coupe "acknowledged it’s likely to make or break his tenure as CEO".

"However, an uncertain outlook on the foods business means the champagne will have to stay on ice for a while yet. Negative LFL sales make an unwelcome reappearance in Sainsbury’s retail business, but these can broadly be attributed to a later Easter and Mother’s Day this year. The bigger worry is around the impact of weaker sterling on the group’s already depressed margins.”

Shares in Sainsbury’s were down 0.55% to 269.80p at 0838 GMT.