It may be a mixed trading update from Sainsbury this morning but traders like it nonetheless. The result is the shares +1.2%, in silver medal position on the UK 100 .

Q1 like-for-like retail sales (ex-fuel) of 0.2% was in-line with Bloomberg consensus, however, groceries +0.5% was well down on Q4’s +2.1% and missed +0.7% consensus. This can be explained by £150m investment in price cuts on meat, fruit and veg, to remain attractive in an increasingly competitive sector. In terms of channels, however, Online +7.3% and Convenience +3.6% is reassuring, helping counter some of the pressure on the more traditional supermarket format.

On the flip-side is General Merchandise +1.7%. This was much stronger than analyst estimates of -0.7%, a big rebound from -1.2% in Q4 and, more importantly, bucks three consecutive quarters of contraction. This is likely attracting most attention this morning, vindicating SBRY’s decision to acquire Argos and insert it in its supermarkets. Because it is helping support group revenue growth while groceries clearly remains pressured by fierce sector competition (market share 15.6% in latest Kantar data vs. 16.9% highs in Jan 2015).

In the vein of revenues being for show and profits for dough, EBITDA synergies of £160m being sought from Argos by next March goes even further to back up the Argos acquisition. Especially with plans to add another 90 stores, expanding and capitalising on the benefit of having two names under one roof. Furthermore, financing of £3.5bn (“on attractive terms) ”has been agreed for the Asda tie-up, something that could further help SBRY revive growth in its grocery offering.

Mike Coupe acknowledges the market remains competitive but he’s confident that “we have the right strategy in place”. Could it be that a two-pronged ASDA/Argos strategy changes SBRY’s fortunes?

Mike van Dulken, Head of Research, 4 July 2018