Sainsbury's ups profit target as Argos adds online cheer over Christmas

After a strong Christmas trading period in which online sales represented a fifth of total sales, Sainsbury's said full year profits are now likely to beat the current consensus forecast.

The long 15-week to 6 January the supermarket group increased sales 1.1% on a like-for-like basis, excluding fuel, beating the 1.0% the market was expecting and a recovery after slipping to 0.6% in the second quarter.

Total sales for the 'third quarter' period, which also took in Black Friday, were up 1.2%, with grocery and clothing up 2.3% and 1% respectively, though sales at the mainly-Argos general merchandise arm fell 1.4%.

A pleased chief executive Mike Coupe pointed to record sales in the week before Christmas, more than 340,000 online grocery orders over the quarter, "stellar growth" from Argos Fast Track delivery and collection as online sales accounted for 20% of group sales for the quarter, with an online grocery order delivered to customers every second.

Same day online grocery delivery, which is seen as key to staving off the challenge of Amazon, is now available from 93 stores, covering 38% of UK households, enabling Groceries Online to enjoy an 8.2% rise in sales. Meanwhile Argos Fast Track collection grew 39% and delivery 25% in the quarter, with customers able to make same-day delivery orders up until 1pm on Christmas Eve and the last Christmas Eve delivery made at a distinctly lastminute 6.39pm.

Fitting in the with the sector trend revealed in industry data from Kantar Worldpanel and Nielsen a day earlier, premium lines were a strong element of the performance this Christmas, with Taste the Difference food sales up on last year, although with more lines added.

Although general merchandise sales fell in the quarter, Coupe noted that these and clothing outperformed challenging markets to grow share. "Argos stores in Sainsbury's supermarkets performed particularly well and Argos saw record sales across the Black Friday period," he said.

There were 52 Argos stores opened within Sainsbury's supermarkets in the quarter, lifting the total to 164 and with 21 more expected before year-end, with 18 replacing existing Argos standalone stores to take the total number of replacement stores to 56.

Thanks to greater synergies from the Argos acquisition, Coupe said he now expects Sainsbury's full year underlying profit before tax will be "moderately" ahead of consensus, which last stood at £559m, though was £572m back in June. Earnings before interest and tax of £80m-£85m from the combination is now anticipated, versus previous guidance of £65m EBITDA.

Coupe still retained a cautious modifier that market conditions "remain challenging and we are cautious about the consumer environment in the year ahead".

Sainsbury's shares, having slipped more than 3% last year, were up 1.3% to 251.7p in early trading on Wednesday.

Analyst Richard Hunter at Interactive Investor said: “Sainsbury has fended off concerns that it could fall into the trap which has ensnared some of the general retailers, although by the same token its recovery remains a work in progress."

He felt it was a "generally robust" performance, with Argos continuing to confound its doubters by increasing sales and contributing a higher than expected level of cost synergies.

"There is, however, no room for complacency. The unrelenting pressure in the sector from the discount supermarkets, a potentially resurgent Tesco and recovering Morrisons, remains in evidence. For Argos, despite its bright start as part of the group, the elephant in the room that is Amazon will continue to cast a long shadow. Meanwhile, the general merchandise numbers need to claw their way to back to positive territory, whilst the general economic wariness in the UK is an overarching concern."

Neil Wilson at ETX Capital agreed the numbers were "decent", "but it still seems to be underperforming competitors in terms of sales growth in its core business", with Morrisons up 2.8% in the ten weeks to 7 January and 3.7% over the last six weeks against very strong comparators.

He stressed that the increased profit guidance is down entirely to Argos synergies, and was disappointed that there was no word on margins that are a concern after dropping sharply in the first half.

"Sales growth in groceries was solid, climbing 2.3% and this was driven by a commendable online performance where Groceries Online enjoyed an 8.2% rise in sales. Online growth is good and we note that the roll-out of same day delivery continues apace, which is proving an important weapon in market place against Amazon etc."