Sainsbury’s profits drop despite success of Argos takeover

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The £1.4bn purchase of Argos helped Sainsbury’s to an 11 per cent increase in revenues in its last financial year, but the supermarket chain warned that rising inflation could eat into its non-food sales as it reported an 8 per cent drop in profits.

Revenues for the year to March 11 were £26.2bn, an 11.6 per cent increase on the previous year and in line with analyst forecasts. However, pre-tax profits fell by 8.2 per cent to £503m, which the company attributed to “investment in the customer offer” as intense competition contributed to a price war that has damaged margins across the sector.

Like for like supermarket sales for the full year fell by 0.6 per cent. The company briefly enjoyed a return to growth over a better than expected Christmas period, but had already signalled a return to decline at the start of this year.

However, its newly-acquired Argos business performed well, driving the increase in total revenues.

Sainsbury’s has been adding Argos concessions inside its larger stores, pitching the deal as a way of becoming one of Britain’s biggest non-food retailers, while occupying some of the surplus selling space built during a decades-long expansion drive.

Sainsbury’s now has 59 Argos concessions inside its larger grocery stores, and said it will accelerate its plans to open more.

The company noted, however, that non-food sales had been affected by rising inflation in recent months, as higher prices raise fears of a slowdown in consumer spending and economic growth.

Supermarkets like Sainsbury’s have historically benefited from rising prices, which allows them to pass on price increases and boost their profit margins, but analysts say the big grocery chains will be cautious about putting up prices lest they endanger the tentative progress they have made towards regaining market share.

Sainsbury’s said today that the overall “impact of cost price pressures remains uncertain”, noting that although the price rises so far have benefited its food business, its non-food sales “have been impacted by reduced consumer confidence and a marked slowdown in real pay growth”.

Recent surveys by research group Kantar have shown grocery prices returning to growth since the start of this year after years of deflation encouraged by strong competition in the sector. Kantar’s latest figures on the sector are due to be released later this morning.

Mike Coupe, Sainsbury’s chief executive, said:

This has been a pivotal year and we have made significant progress delivering and accelerating our strategy.

We are pleased with the progress made since we acquired Argos. We have opened 59 Argos Digital stores in Sainsbury’s supermarkets and they are performing well. We are therefore accelerating our plan to open a total of 250 Argos Digital stores in Sainsbury’s supermarkets and will deliver our £160m ebitda synergy target by March 2019, six months ahead of schedule.

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