Unfortunately, a combined 0.3% rise in Argos and Sainsbury's (LON:SBRY) supermarket underlying sales masks a deterioration at Sainsbury’s which investors are unlikely to overlook. Sainsbury’s 0.5% like-for-like shrinkage shows that growth between Christmas and end-February of 0.1%-0.3% has faded. It coincides with a moderate hardening of prices on the high street, though it’s too early to attribute to any sort of impact on demand.
Sainsbury’s 0.5% LFL decline is the same as in July-September. That at least suggests visibility is returning to the supermarket performance, even if the failure to keep momentum from the winter months going is concerning. As to input cost pressures, the group’s statement skirts the issue of how soon they might need to be filtered out to customers, noting only that “the impact of cost price pressures remains uncertain”. That’s reasonable given the fluid outlook for exchange rates. However, it is inconceivable that Sainsbury’s and its closest competitors will not have modelled for an environment where prices steepen sharply. That gives a slightly different feel to the outlook they’re expecting than “uncertain”.
For the moment though, the bulk of the 6.8% September-January hike in wholesale food prices is largely being masked by supply contracts which prevent significant increases over the short term. Therefore, to us, in light of food sales growth recently swinging into positive at WM Morrison's (LON:MRW) and Tesco (LON:TSCO), the continuing retreat by Sainsbury’s simply suggests it has been outmanoeuvred on price. That calls recent strategic changes by Food Commercial Director Paul Mills-Hicks further into question.
The continuing bright side of the group is of course Argos, where same-store sales accelerated to 4.3% from 4% in the third quarter, confirming that a performance similar to market leader Dixons Carphone (LON:DC) is plausible. (Dixons’ UK and Ireland established-store growth was 6% in 10 weeks to early January). The rapid stabilisation of the Argos asset should also silence critics who were sceptical about the logic of the acquisition, though increased exposure to more dynamic general merchandise pricing remains another front for risk.
Sainsbury’s Argos sales do however increase confidence that core operating profit for the year will meet expectations of a 1% slide to around £694m. If confirmed, investors may be inclined to be more patient whilst the group redoubles grocery efforts to compete more convincingly with rivals, as they reclaim market share from Aldi and Lidl.