With headwinds from the second half of its 2016/17 financial year, the first half of 2017/18 was always going to result in a decline in year-on-year profitability from Sainsbury’s.

And so it came to pass that underlying interim profits fell 9% to £251m.

That performance was actually a little bit better than we had expected, beating our £241m estimate by £10m through more robust than anticipated margins.

Despite higher labour costs, involving a previously announced pay rise for shop staff and some price investment, the broader work that Sainsbury’s is doing on costs is supporting the bottom line.

Indeed, management was able to announce that aggregate three-year benefits from the group cost reduction programme would be £40m higher than previously guided, at £540m, by March 2018.

Furthermore, management has reiterated its intention to release a further £500m of costs out of the system between 2019 and 2021.

Such guidance allowed Mike Coupe, Sainsbury’s wise owl chief executive, to reiterate an expectation that the group would meet prevailing underlying pre-tax expectations for 2017/18 of £572m, a little behind our £585m target.

“The concern is that if sales do not persist at a satisfactory level, then the cost reductions and synergies from the Argos acquisition will not hit the bottom line due to negative operational gearing”

So, from a profit delivery and margin perspective, Sainsbury’s interim results came butter side up and represent a sound step forward.

However, there was a sting in the tail of this set of results and that is the trading momentum that Sainsbury’s recorded during the second quarter of the current financial year.

Here, we also have to say that the business is not helped one iota by, frankly, poor disclosure.

Sainsbury’s has broken with tradition and not revealed grocery like-for-like sales, although its low number of store openings means the total sales figure is a fair representation of same-store performance.

At a total level, both grocery and general merchandise sales fell more than we anticipated in the second quarter after an encouraging Q1.

The general merchandise sales now include the acquired Argos business, where there are an awful lot of moving parts, including the exit from Homebase outlets, store closures on the high street, store transfers to Sainsbury’s supermarkets and some infill openings.

These moving parts make the lack of a like-for-like figure all the more challenging.

It should be said that clothing sales held up well in Q2.

The slowdown in sales is a real concern and the reason that the share price is red following the announcement.

Heightened nervousness

Quite simply, the concern is that if sales do not persist at a satisfactory level, then the cost reductions and synergies from the Argos acquisition – again reiterated at £160m of EBITDA – will not improve the bottom line due to negative operational gearing.

This is a worry – one that we are much more alive to today than has been the case over the last year or so.

Over the festive period, Sainsbury’s must demonstrate more robust trading momentum that allows us to not just retain full-year 2017 forecasts but, more importantly, the big anticipated step-up in profitability in 2019. 

This is when Argos synergies are set to flow much more materially through to the line that shareholders may benefit from.

For now, we give Messrs Coupe and Rogers the benefit of the doubt, meaning that Sainsbury’s shares may represent very good value upon delivery of the prepared plan.

But our nervousness about the capability to deliver this anticipated growth has been heightened following the Q2 trading results.

We wish the Sainsbury’s team well for the forthcoming peak period, but better momentum may be needed for the Argos plan to deliver on its potential.

Clive Black is head of research at Shore Capital

Shore Capital head of research Clive Black