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Why I think closing Argos stores is a good move for Sainsbury shares

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Sainsbury (LSE: SBRY) shares have seen a fairly flat year all things considering. The first lockdown of 2020 saw panic buying in all the major supermarkets. As essential businesses, supermarkets were able to remain open and also benefitted from increased online shopping.

As I write this, the Sainsbury share price is down on the day despite news this morning that it will be closing four out of five stand-alone Argos stores in the coming years. I am surprised these cost cutting measurers are not being taken more positively.

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Today’s news

The supermarket said this morning that by 2024 it will close around four-fifths of its stand-alone Argos stores. This translates to a potential 3,500 loss of jobs. CEO Simon Roberts did suggest these positions will be more than made up for by roles elsewhere.

Sainsbury said that after the first lockdown this year, some 120 stores did not reopen. These will now be closed permanently. To make up for this reduction, it will be adding 200 Argos collection points to supermarkets and convenience stores.

Today’s update also came with some financial results, which generally seem okay if not exactly rip-roaring. Underlying profits were above analyst estimates at £301m for the half year, while sales growth was up 8.2%.

A one-off charge of £438m relating to the Argos store closures did cause a H1 pre-tax loss of £136m though. Sainsbury also issued a special dividend of 7.3p.

Focusing on what matters

The Argos closures come as part of a larger strategy for Sainsbury’s. Earlier this month it said it is considering the sale of its banking arm because of the low interest rate environment. It also plans to close its meat, fish, and delicatessen counters due to low demand.

Sainsbury said it will make about £600m from this and other cost reductions (not the potential sale of its banking arm) to reinvest in new products and lower costing items. Simply put, it seems to be focusing on its core grocery business going forward.

In many senses, the increase in online shopping makes this a sensible move. With the Argos store closures, deliveries or store pickups are a better use of resources.

Similarly online grocery shopping is becoming an ever more important business for Sainsbury. Covid and lockdowns are acting as a catalyst in this industry. It seems the trend that had already started is set to move ever more rapidly.

Are Sainsbury shares cheap?

Unfortunately, while I don’t think the future is particularly grim for Sainsbury shares, things are still uncertain. I like the special dividend, and I like the consolidation of its Argos stores. I think the sale of its banking arm could also be a good thing.

The moves all smack a little of desperation though. A big shift in the way it works worries me that it needs to make these changes more than we perhaps realise. Personally I am happy to hold on to my Sainsbury shares, but I won’t be buying any more just yet.

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Karl has shares in J Sainsbury. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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