J Sainsbury Outperforming its rivals

Being the UK's third largest supermarket chain doesn’t make J Sainsbury (LSE, SBRY) the third best. The group’s market share is near a decade high and like-for-like sales have seen 31 quarters of consecutive growth. 

In the year to the end of September the market share of Sainsbury’s increased to 16.7% from a figure of 16.6% the year before.  This might not sound like much but in the hyper-competitive UK supermarket space it provides something to boast about.

The group also saw like-for-like sales (excluding fuel) increase by 1.7% in the six months to September which compares to a 0.6% decline at market leader Tesco.  This has served to bolster Sainsbury’s bottom line with a 4% H1 increase in operating profits.

Supermarket groups are at a crossroads with rapid space expansion being called into question.  However, smaller convenience stores are seeing growth while financial services and non-food offer opportunities.

For investors Sainsbury’s offers a relatively defensive stock although its expansion into non-food is at risk of competitive attack from Internet only firms.  Sainsbury’s also stands out for its strong balance sheet that is supported by £11.2bn of properties.

With a business that is focused on the UK only it is perhaps no surprise that Sainsbury’s has stole a march on some of its rivals. Like-for-like sales at the group were up a respectable 1.7% in H1 albeit with a 0.8% boost from store extensions.

With net new space of 2.4% the group saw total sales growth of 4.1% in the six months to the end of September.  In the second half of the year the like-for-like sales are set to be in-line with last year while the contribution from new space is forecast at 2%.

Total gross space is set to increase 5% this financial year with Sainsbury’s opening 1-2 new convenience stores a week.  In fact convenience stores are growing at almost 20% a year with 49 new stores in the first half.

A key area of this is clothing with Sainsbury’s partnering with the group’s Tu clothing range achieving its best every sales on Saturday 29th September.  Other areas being developed are internet grocery shopping which is growing at 20% a year and Sainsbury’s Bank which saw JV profits up a third.

For investors any success in sales is only relevant if it translates into the bottom line.  Sainsbury’s saw an in-line performance with revenue growth of 4% generating operating profit growth of 4% in the first half.

In terms of the balance sheet Sainsbury’s stands out for its robust property portfolio that was valued at £11.2bn.  Net debt was £2.2bn as of the end of September while net interest cover was a sturdy 7.3X.

The stock trades on 11.3X forecast earnings for the year to March 13 which falls to 10.9X for the following year.  Meanwhile the dividend yield for the current year is 4.9% which increases to 5.2% for next year.

This article was produced by Senior Research Analyst, Andrew Latto