Sainsbury's profit rise driven by Argos cost savings

(Reuters) - Sainsbury’s (SBRY.L), Britain’s No. 2 supermarket group, beat forecasts with a 20 percent increase in first-half profit on Thursday, as it delivered cost savings from its Argos general merchandise chain ahead of schedule.
FILE PHOTO: Customers shop in a Sainsbury's store in Redhill, Britain, March 27, 2018. REUTERS/Peter Nicholls/File Photo
The group, which is seeking regulatory approval to take over No. 3 player Asda (WMT.N), also said the outlook for British consumers was uncertain heading into the key Christmas season.
“The grocery, general merchandise and clothing markets continue to be highly competitive and very promotional,” it said.
However, the firm said it remained on track to meet analysts’ average pretax profit forecast for its 2018-19 financial year of 634 million pounds, up from 589 million pounds made in 2017-18.
For its first half to Sept. 22, Sainsbury’s made an underlying pretax profit of 302 million pounds - ahead of analysts’ mean forecast of 280 million and the 251 million made in the same period last year.
Group sales rose 3.5 percent to 16.9 billion pounds and the interim dividend was held at 3.1 pence per share.
Sainsbury’s said that while like-for-like sales, excluding fuel, increased by just 0.6 percent, it benefited from cost savings of 121 million pounds - some 63 million of which were synergies from the Argos business Sainsbury’s purchased in 2016.
“We have delivered a solid first half performance and profit has increased because we have delivered significant Argos synergies ahead of schedule,” said Chief Executive Mike Coupe.
He said sales of food and general merchandise were boosted by Britain’s hot summer, but general merchandise margins remained under pressure.
Although industry data shows Sainsbury’s trading performance is lagging rivals, its shares are up 32 percent this year on the back of April’s agreed 7.3 billion pounds takeover of Walmart (WMT.N) owned Asda - a deal that could see the group leapfrog Tesco (TSCO.L) as Britain’s biggest retailer.
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According to recent industry figures, Sainsbury’s has seen the weakest trading among Britain’s big four grocers, which also includes fourth-ranked Morrisons (MRW.L).
That has led some analysts to question whether Sainsbury’s store standards have suffered from its pursuit of at least another 500 million pounds of cost savings in the three years starting in 2018-19, having already achieved 540 million in the prior three years.
Britain’s Competition and Markets Authority (CMA) said last month it expected to issue provisional findings on Sainsbury’s planned purchase of Asda early next year.