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Is J Sainsbury plc Set For Electrifying Earnings Growth In 2014?

I am a long-standing fan of J Sainsbury plc (LSE: SBRY) (NASDAQOTH: JSAIY.US) and the innovations the firm has introduced to boost its position in the British grocery space.

Still, Sainsbury is not immune to the growing popularity of budget retailers, and investors should be aware of the threat that such chains carry to Sainsbury in the current economic climate.

A strong selection despite increased competition

Although Sainsbury has battled these new entrants better than mid-tier rivals such as Tesco and Asda, the latest Kantar Worldpanel statistics showed Sainsbury’s market share dip for the first time in two years. In the 12 weeks to November 10, it fell to 16.8% from 16.9% in the corresponding 2012 period, Reuters reported.

By comparison, Aldi and Lidl grew their combined share of the grocery market to 6.9% from 5.7% during the same period. And these usurpers are aiming to capitalise on the increasing squeeze on consumers’ living costs by accelerating new floorspace — Lidl’s UK managing director told City AM this week that it intends to hike the number of new store openings from 20 per year to between 30 and 40.

Furthermore, market share momentum from high-end retailers like Waitrose is also set to rattle mid-tier operators such as Sainsbury further, with the high-end share rising to 4.8% from 4.6% during the same 12 weeks.

Despite the attack from above and below, however, Sainsbury has proven broadly resilient, growing its market share by stealing consumers from its fellow mid-tier operators. The company announced last month that 35 consecutive quarters of underlying sales growth helped to power its market share to decade highs around 16.8%.

While Tesco’s commitment to expanding its operations overseas has seen its #1 position in the UK slowly erode in recent years, Sainsbury has identified a number of crucial areas to keep growing its customer base at home, from developing the quality and image of its in-house products, such as its Taste The Difference range, through to introducing schemes to keep its prices competitive.

Looking ahead, the supermarket is set to continue growing its presence in the rapidly-expanding convenience-store segment, and is opening an average of two new outlets per week. Sainsbury is also introducing a raft of improvements in coming months to its online grocery outlet, where sales continue to outstrip the market average, and this red-hot area represents a trump card in the battle against the budget chains.

Sainsbury has punched more than five years of solid earnings expansion, and City analysts expect growth to keep rumbling higher well into 2014. Current forecasts put earnings per share growth at 9%, to 32.6p, for the 12 months ending in March, with an additional 7% rise, to 35p, pencilled in for the year ending March 2015. In my opinion Sainsbury is in great shape to post strong earnings growth for years to come.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco.