Sainsbury’s (SBRY) reaffirmed itself as the slowest growing of the major UK grocers on Wednesday, but it’s the City shrugged off its stagnant sales to focus on news its mega-merger with Asda is a step closer.

Sainsbury’s like-for-like sales slowed to 0.2% in the first quarter compared with growth of 0.9% in the previous year and 2.3% in the corresponding period last year. Sainsbury’s put the slide down to increased investment in reducing prices amid fierce competition, though grocery sales growth of 0.5% suggests it is losing market share.

HSBC commented: “Stripping out inflation means volume sales are in decline, and even more so in the core estate. Management points out it reduced prices in Q1 and that this is hurting sales ahead of an anticipated volume gain over the next several months. However, we think price is getting sharper elsewhere and that Sainsbury’s cuts were more about coming back into line.”

There were, though, some signs of encouragement. Notably its investment in Argos is continuing to pay dividends, with general merchandise sales gaining 1.7% in the quarter - a better performance than analysts had predicted.

Most notably for the City Sainsbury’s announced it had agreed a £3.5bn financing packaging for its merger with Asda. The supermarket’s shares jumped 3% on Wednesday to 328p as investors welcomed the news that more material steps were being taken towards completion of the UK supermarket megadeal.

Barclays also suggested the headline figures were less downbeat than they appeared noting: “Against relatively low expectations, we think the statement was broadly encouraging. With price investment having been made in the core grocery business – and with comps getting somewhat easier in the coming quarters - there is reason to be cautiously optimistic that grocery sales growth may improve from here.”

However, SocGen cautioned: “We see no reason for greater optimism on the figures themselves. The planned merger makes sense but the UK CMA competition review will take one year.

Elsewhere, Associated British Foods told the City on Thursday that increased profitability at Primark would be dragged back by worse than expected performance in its sugar arm AB Sugar. It said full-year profits were on course to meet expectations, but that it now expected a reduced profit from AB Sugar as a consequence of lower EU sugar prices. Sales at Primark in the year to date were 6% ahead of last year at constant currency and 7% ahead at actual exchange rates. It has achieved those sales at higher margins than expected to mitigate the drop in sugar profits.

Elsewhere, Associated British Foods (ABF) told the City on Thursday that increased profitability at its Primark retail arm would be dragged back by worse than expected performance in its sugar arm AB Sugar. It said full-year profits were on course to meet expectations, but that it now expects a reduced profit from AB Sugar as a consequence of lower EU sugar prices. AB Sugar’s revenue was down 17% in the quarter.

The good news of a mixed trading update, said sales at Primark in the year to date were 6% ahead of last year at constant currency and 7% ahead at actual exchange rates, driven by increased retail selling space. It has achieved those sales at higher margins than expected to mitigate the drop in sugar profits.

However, shares in ABF sank 4.8% to 2,586p on the weaker than expected sugar division sales and slower than expected expansion of Primark’s store estate.

 

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