| 12.7°C Belfast

Sainsbury's sales recovery expected as Argos gains provide boost

Close

Sainsbury's is expected to report an increase in profits

Sainsbury's is expected to report an increase in profits

Sainsbury's is expected to report an increase in profits

Sainsbury's is expected to report a sales recovery when it announces first quarter results next week, helped by rising shop price inflation and a continued strong performance at Argos.

The supermarket giant is tipped by City analysts to report a 2% rise in like-for-like sales over the period, a significant improvement on the last quarter's 0.3%.

While the core supermarket business continues to face headwinds, overall sales are expected to be boosted by a further rise in inflation and a strong performance in non-food categories, as well as growth at Argos.

James Grzinic, analyst at Jefferies, said the performance will be boosted by "recovering supermarket like for like sales, albeit with growing inflation masking soft food volume performance, and solid Argos gains".

The pound's collapse following the Brexit vote has driven up inflation which, in moderation, can help supermarkets boost their sales and profit margins.

However, it can also drive shoppers to seek out bargain alternatives as rising costs are passed on to consumers.

In May, the Big Four chain warned over a hit from falling consumer confidence as price hikes start to bite after it suffered its third straight year of falling profits.

The group revealed bottom line profits dropped 8.2% to £503 million for the year to March 11, while underlying profits fell 1% to £581 million.

Sainsbury's said the squeeze on household spending was impacting general merchandise and clothing sales growth as Brexit-fuelled inflation outstrips wage increases.

This was only partly offset by a £77 million boost from the recently bought Argos chain, snapped up last year when it took over Home Retail Group for £1.4 billion.

Sainsbury's is forecasting cost price inflation of 2% to 3% over the financial year, which is providing a welcome fillip for under-pressure food sales.

First quarter results will combine the numbers for Argos and Sainbury's for the first time since the acquisition last year.

Although no split for Argos will be provided this time around, Barclays analysts expect like for like sales growth at the chain to track in line with the two prior quarters, at around 4%.

Experts at Jefferies also expect growth at Argos, albeit slightly slower than the previous period, due to tougher comparisons.

With the Argos acquisition under its belt, Sainsbury is continuing to look for brands to add to its shopping basket.

It is understood the group is now looking to buy Nisa, the network of more than 2,500 independently-owned convenience stores, in a deal worth close to £130 million - as part of a response to Tesco's £3.7 billion merger with wholesaler Booker.

Jefferies said: "We can see the strategic rationale of Sainsbury's boosting food buying volumes by well over 5% at a time when the business struggles to do so organically.

"The rumoured £130 million price tag would be good value and helpfully accretive when considered under this light.

"However, this also underlines the need for such actions at a time when the core food business has been lagging peers for much of the past year."