Sainsbury’s synergies from Argos deal helps boost profits

The supermarket chain posted a 20% rise in underlying pre-tax profit, a figure supported by cost-savings and synergies obtained from its deal with Argos, with the company hoping to see similar success if Asda deal is approved.

Sainsbury's supermarket store front
Source: Bloomberg

Sainsbury's (LON:SBRY) recorded a 20% increase in underlying pre-tax profit to £302 million in its first half (H1) results, up from £251 million during the same period last year.

The supermarket chain also recorded a decent uptick in group revenues of 16.9 billion, representing a 3.5% increase. The strong set of results shows that the company’s growth strategy is working at a time when the company is facing pressure on general merchandising margins and a rapidly changing consumer market.

“The market remains very competitive and we are transforming our business to meet rapidly changing customer needs,’ Sainsbury’s Group CEO Mike Coupe said.

‘We have fundamentally changed how our 135,000 Sainsbury’s store managers and colleagues work and I would like to thank them for their ongoing hard work through this period.’

Sainsbury’s and Argos partnership prevails

A strong H1 showing for Sainsbury’s is partly due to the supermarket benefitting from cost-savings and synergies from its deal with British catalogue retailer Argos, after it acquired its parent company Home Retail Group in Q3 2016. The deal was valued at around £1.4 billion.

Following the deal, Sainsbury’s has ramped up its roll-out of Argos stores in its supermarkets, with plans to put an outlet in another 200 locations over the course of the next three years.

‘We have delivered a solid first half performance and profit has increased because we have delivered significant Argos synergies ahead of schedule. Sales of food and general merchandise were boosted by the hot summer, but general merchandise margins remain under pressure,’ Coupe said.

‘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,’ he added.

Sainsbury’s-Asda merger in review

Sainsbury’s £7.3 billion tie-up with rival Asda is currently being reviewed by the UK Competition and Markets Authority (CMA), with the regulator raising concerns that consumers could face higher prices and a poorer quality of service due to geographical overlap of stores in key locations.

One remedy proposal for the CMA’s concerns would see Sainsbury’s and Asda shut down more than 460 stores in areas where there is significant overlap.

If the deal is given the green light the newly formed entity would see it overtake market leader Tesco (LON:TSCO) and help the supermarket chain fend off competition from low-cost German rivals Aldi and Lidl.

‘Our proposed combination with Asda will create a dynamic new player in UK retail, with the ability to further lower prices and to reduce the cost of living for millions of UK households,’ Coupe remarked.

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