Integration of Argos stores drives profits at Sainsbury’s

The company said that much of the growth was down to the integration of catalogue retailer Argos, which Sainsbury’s acquired at the end of 2016.

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Since then it has moved 251 standalone Argos stores into Sainsbury’s supermarkets, with 60 moves completed in the period under review.

That contributed to the business making £121m of cost savings in the first half, with the total for the full year expected to hit £200m.

Chief executive Mike Coupe said that while the market remains “very competitive” the company has delivered “a solid first half performance and profit has increased because we have delivered significant Argos synergies ahead of schedule”.

Sales across the business rose by 3.5% to £16.9 billion, with a 17.7% rise in fuel sales driving much of the increase. With fuel stripped out, retail sales increased by a total of 1.2%.

Within that, grocery sales rose by 1.2% and general merchandise by 1.5% while clothing sales were down by 1%.

“Sales of food and general merchandise were boosted by the hot summer, but general merchandise margins remain under pressure,” said Mr Coupe.

“Our strategy of offering customers a distinctive range of high quality and great value food has driven like-for-like sales growth at Sainsbury’s. Where we have invested to lower prices, volumes and transactions have increased.”

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Mr Coupe added that the proposed tie-up between Sainsbury’s and Asda will “create a dynamic new player in UK retail” because it will enable the business “to further lower prices and to reduce the cost of living for millions of UK households”.

First announced in April, the Asda deal is currently the subject of a full investigation from the Competition and Markets Authority (CMA), which is looking to determine whether the deal would leave customers in “hundreds of local areas” facing higher costs and poorer service.

Having concluded the first phase of its investigation in September, the watchdog said it was carrying out a more in-depth review because the proposal “raises sufficient concerns”.

“The companies are two of the largest grocery retailers in the UK and their stores overlap in hundreds of local areas, where shoppers could face higher prices or a worse quality of service,” the CMA said at the time.

“These concerns will be considered further in the phase two investigation, along with other issues raised so far with the CMA, including those relating to fuel, general merchandise such as clothing and increased buyer power over suppliers.”

Analyst Laith Khalaf of Hargreaves Lansdown said that while Argos is proving to be “an ace up the sleeve for Sainsbury’s”, the Asda deal would be a “game-changer” for the business.

He added that the ability to “roll out further Argos outlets within Asda’s store network is a tantalising prospect”.

During the six months under review Sainsbury’s spent £17m on transaction costs related to the Asda transaction.

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In June Sainsbury’s arranged £3.5bn of finance to fund the deal, with the sum split into two separate term loans. Of that, £2bn will be lent over two years with the option to extend to three and a half and £1.5bn will be lent over three years with the option to extend to five. The loans will only be made as and when the transaction completes.

Earlier this week fellow retailer Marks & Spencer reported a 3% contraction in first-half revenues to £5bn. Sales in the firm’s clothing and home division fell by 2.7% while M&S Home reported a fall of 0.2%.

While M&S’s share price fell by 0.5% to 300.9p on the back of its results, Sainsbury’s saw its shares rise by 1.5% yesterday to 324p.