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Smart Investor: is Sainsbury's king of the supermarkets?

Against a tough retail backdrop Sainsbury's has managed to increase sales while its rivals have struggled. Time to stock up on the shares?

 
Smart Investor: is Sainsbury's king of the supermarkets?

The past couple of years have proved difficult for the supermarket sector. A challenging UK economy, which has offered little or no growth, has spawned an increasingly savvy and ruthless consumer who rigidly focuses on price and value.

The result has been margin contraction, a reduction in capital expenditure and (the old analyst's favourite) a decline in like-for-like sales.

However, FTSE 100-listed Sainsbury (SBRY.L), led by chief executive Justin King, has managed to deliver positive like-for-like sales throughout the past few years; in this week's interim results statement it reported a 1.7% rise in like-for-like sales.

This has mainly been because of a successful ‘brand match’ offer, where Sainsbury's checks the prices of leading brands against its main rivals and, should they be more expensive, gives the customer a voucher to use next time they shop.

Although this marketing tactic has proved popular thus far, is Sainsbury's an attractive investment opportunity?

Humble beginnings

The company started life supplying own-brand products from its store in Drury Lane in 1869. Since then, it has been the first supermarket to offer self-service tills, the first to computerise distribution and the first to sell Fairtrade food.

Today, Sainsbury's trades out of more than 1,000 stores (including 440 convenience stores), employs more than 150,000 people, and operates a bank and various property joint ventures.

With a market capitalisation of £6.5 billion, Sainsbury is the 51st-largest company in the FTSE 100.

Performance review

In terms of performance, the past five years have been fairly impressive, with Sainsbury's making a net profit in each year. However, in spite of net profit increasing at an annualised rate of 13% over the period, it has flatlined over the past three years, with 2012’s £598 million just £13 million more than in 2010.

Of course, given the difficult trading conditions this is still impressive, although an average return on equity (ROE) of 9.5% over the past five years, hitting 10.6% last year, is less so. Such ROE levels are acceptable, but nothing more.

Meanwhile, Sainsbury's currently yields 4.6% from a payout ratio of 51%, making shares relatively attractive for income seekers. Sainsbury is in the top-20 highest-yielding stocks in the FTSE 100 and, furthermore, dividends per share have increased in each of the past five years; increasing at an annualised rate of 10.6%.

In terms of viability, a debt-to-equity ratio of 49% is moderate, and means that interest cover is fairly comfortable at 5.7. Of course, the supermarket sector has had a rough ride in recent years, with consumers spending less and demanding more. The result has been margin contraction and a slowdown in the rate of store building.

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16 comments so far. Why not have your say?

Brian Stafford Garthwaite

Nov 16, 2012 at 17:19

My local Sainsbury offer Nectar Points, plenty of "special offers" and dscount vouchers, I wonder just how profitable this really is. About a mile away is a large ASDA T/O around £1 million each week, in between a recently opened WAITROSE which rumour has is losing money. Food retailing seems a very tough business, I would not buy Sainsbury.

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stormdog

Nov 16, 2012 at 17:53

Are comparison figures available showing which of the supermarkets make the greatest profit per square foot?

Who knows, it might just turn out to be Aldi or Lidl, neither if which are quoted.

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Brian Stafford Garthwaite

Nov 16, 2012 at 18:45

I do not have those figure. However I use ALDI and have noticed in past year

(a) Much busier - car park often full.

(b) Quality of more, mercs,BMW and 4x4

There could be more people - like myself - doing "basic" shopping in ALDI and using Sainsbury or other main stream Supermarket for the "extras"

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Rob Walker

Nov 16, 2012 at 18:52

Note: " Sainsbury's needs to generate a higher level of profitability to warrant a higher share price. This will take time, but is likely to occur in the medium to long term as the state of the UK economy improves." There is not a shred of evidence for this encouraging statement. Sainsburys are probably the best of the UK Supermarkets but current positionis largely because the competitors keep shooting themselves in the foot. Morrisons are still not a clearly-defined offering years after the big Safeway takeover, shoppers have tired of the Tesco 'new tricks, no substance' offerings which quickly revert to optimum margin and Asda can't attract new customers because of the ones already shopping there!

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stormdog

Nov 16, 2012 at 19:06

We do the same, except we do Lidl, we then do Waitrose for the "extras".

The Lidl car park appears to contain the same vehicles as can be found at Aldi.

Interestingly I was told by a London caterer that the frozen Lidl prawns are the best of their type available. Now having tried them, they are the ones in a black pack, I concur.

Perhaps a situation will come about where people instead of discussing the relative merits of Sainsbury's and Tesco will switch their conversations to discussing Lidl and Aldi!

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Brian Stafford Garthwaite

Nov 16, 2012 at 19:12

I agree with Rob Walker which is why have decided to steer clear of all quoted supermarket shares

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Georgie

Nov 16, 2012 at 20:56

'Traditionally' have been an ASDA fan now alternating with Tesco to compare and accept various offers- have always shopped at ALDI or LIDL when they were available and now use them regularly for certain items as their branch numbers have increased.. more so in the case of ALDI for a decent low price wine or three. Shop around is the answer IF you have the time, constitution and desire to do so. I have the time and look at the price reductions and offers as a way of earning a little additional income as part of the fun! You don't pay tax or National Insurance on a reduction! But then I have a 1950s outlook to life... poor old sod!

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Brian Stafford Garthwaite

Nov 16, 2012 at 21:11

Georgie I do much the same tween Aldi and Sainsbury

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Philmo

Nov 16, 2012 at 21:31

Wonder what Warren Buffet's current thoughts are?!

HO, ho, ho.

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doug186

Nov 16, 2012 at 22:47

I am a Morrison fan. As far as I am concerned for fresh meat, fish, fruit and vegetables, they are head and shoulders above the rest. Increasing dividends when reinvested compound to make Morrisons a sound investment. At 250/260p, their shares are attractively priced. Current yield is about 4.1%, recent interim dividend up 10%.

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Brian Stafford Garthwaite

Nov 17, 2012 at 00:34

doug186 - I agree with yr comments about MORRISON, I can walk to Sainsbury,Waitrose and ASDA, ALDI is just one mile, but MORRISON involves 14 mile round trip!

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Philmo

Nov 17, 2012 at 00:45

I can identify with pretty much all the comments here.

The two German's are hard to beat for value and service and Morrisons are making the best fist of competing with them as well as the upper end stores.

I have same problem as BSG though - Morrisons need more "local" stores.

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stormdog

Nov 17, 2012 at 08:06

I have been wondering for some time whether or not there may be a few chains of local stores that have slipped below the radar, in particular the Middle Eastern ones.

There are a few of them near me.

Some of these stores are very well presented and stocked, the goods are intelligently displayed and cross over into many of the basic lines carried by the big chains and there is nearly always a line of people waiting to pay.

Often they are run by managers and clearly they are not all just 'mom and pop' operations since the retailing skills behind some of them are well developed.

Please has any research been done into the ethnic store segment, It must by now be big enough to register?

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Kenpen2

Nov 17, 2012 at 11:07

While I concur about Aldi quality and value, watch out for their sneaky camera-controlled car parks !! I'm currently fighting a £70 "fine" for a 13-minute overstay. Miniscule, black-painted cameras and not a shred of warning about them - decidedly underhand and with an intolerant "you vill do vat you're told" attitude to appeals. I won't ever shop there again.

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John Pringle

Nov 17, 2012 at 15:53

Like a lot of contributors above, I used to do all my shopping at Sainsbury's, however, I now get the bulk at Aldi which is almost next door and then get the rest and my petrol at Sainsbury's.

This habit seems to be spreading and I wonder how the big supermarkets are going to lure these customers back, whilst maintaining their margins.

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Philmo

Nov 17, 2012 at 16:47

JP

By developing the "local" small/medium concept.

ASDA made a killing in my village/township with their local [conversion of a previous Quicksave] and staff at the previous main COOP grocery are visibly greying at the reducing footfall.

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