Having seen its position as the king of the supermarkets usurped by great rival Tesco (LON:TSCO) during the 1990’s, the focus now for Sainsbury (J) (LON:SBRY) is to expand its UK food and non-food offering and try and reclaim some lost ground. Rising taxes and unemployment will provide obstacles for the sector as a whole however increasing margins, product mix and floor space at J Sainsbury suggest that whilst difficult economic conditions may slow profits, long term earnings continue to look robust.
A key tax rise from the perspective of UK supermarkets is VAT and in the recent emergency budget the Chancellor increased this to 20% from the end of the year. This is by no means insignificant as only at the end of last year the rate was at 15% in order to maintain the health of the economy. The increase from 15% to 17.5% at the start of this year appears to have damped consumer spending and a further rise to 20% may well have the same effect.
J Sainsbury's first quarter of its current financial year saw like-for-like sales come in at a rise of only 1.1% excluding fuel. This compares to a rise of 4.3% for year to 31st March 2010 - the last financial year - and thus appears to constitute a slight slowdown. Like-for-like sales should usually rise above the rate of inflation, which has recently been above the Bank of England's target of 2.5%.
The recent trading statement showed that the group is increasing its size with a 4.4% increase in total sales excluding fuel. Key drivers were strong growth in the non-food offering where the company had its best ever week in clothing and has become the UK's fastest growing DVD retailer.
The online grocery business also saw good growth with a sales rise of just below 20% and a record 120,000 weekly orders. Strong sales around the World Cup also helped… it was not just beer but Vuvuzela’s also flew of the shelves.
Total floor space is set to increase by 1.45 million sq ft in the current year while there were also sale and leasebacks which generated £85 million. Releasing capital from property helps reduce debt and fund expansion. The strong property portfolio is also a reason that J Sainsbury was viewed as a bid target during the private equity boom years.
Rumours of a bid refuse to go away and it is always hard to tell if they are just broker generated or not. In mid 2007 the Qatar Investment Authority (QIA) tabled a £10.6 billon bid for Sainsbury's at 600p a share which didn't go through. The latest rumour of another bid pushed J Sainsbury’s share price up by 5% earlier this month.
Of recent interest has been that the QIA has been increasing its stake in the group which certainly adds credibility to the bid talk. With property valuations having weakened since 2007, and equity markets less buoyant, any bid may be at a price significantly below the one made three years ago. And what’s more, J Sainsbury may well appear a much more attractive option than low-yielding sovereign debt.
Article produced by Senior Research Analyst, Andrew Latto.
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