Business is booming and it's attracting more customers than ever -- but is this as good as it gets for the recovering retail superstar?
In reports to investors, J Sainsbury (LSE: SBRY) cites its 'good, better, best' approach to recessionary retailing, which enables customers to trade up or down according to their budget without abandoning Britain's third-largest grocer.
But reading its final results for 2008/2009 this morning, I wonder if 'good, better, best' doesn't also reflect the company's performance over the past five years.
In particular, was today's expectation-beating rise in profits as good as it gets for shareholders?
Not that profitable expansion is to be sniffed at in today's market, let alone at Sainsbury, which looked in terminal decline earlier this decade. CEO Justin King took charge in 2004, and he has turned the company around.
Good was Sainsbury's return to retailing basics, after a previous multi-billion pound investment in semi-automated supply systems left customers facing empty shelves like Soviet-era housewives -- as well as the ousting of chairman Peter Davis who as CEO presided over Sainsbury's downfall.
Better was the acquisition of a string of convenience stores in 2006, and a return to consecutive quarter-on-quarter sales and dividend growth.
Best so far for shareholders were successive takeover bids in 2007, which pushed Sainsbury's share price towards the 600p mark that the then-critical Sainsbury's family said they'd consider selling at.
Recession-beating results
Unfortunately, the credit crisis saw that takeover interest dissipate and took the share price with it, to a low of 240p last October.
Sainsbury's management has instead focussed on boosting profits through even better food retailing, expanding non-food sales, growing floor space through new stores large and small, and initiatives such as banking and a more active management of the property assets that had attracted those predators.
Today's results show how well they've delivered on their aims.
Profits were up 11% to £543 million (though after tax profits dipped slightly due an accounting write down on falling property values). Like-for-like sales from older stores were up 4.5%. Total floor space grew by 4%, with a 60,000 sq ft store in Milton Keynes the largest new opening in eight years, and a further 5% increase in floor space is due next year, where there will be more emphasis on non-food goods. And Sainsbury's Bank has turned into a money maker, although income so far is a modest £4 million.
Even the £124 million charge booked against the property portfolio can hardly be blamed on management given these tumultuous times for real estate -- especially when the pain was partially offset by a £57 million profit generated elsewhere through judicious juggling of Sainsbury's property chips.
Long live the King?
Sainsbury's shareholders can only applaud how Justin King and his staff have performed in the past five years. But where do they go from here?
The supermarket chain occupies an unenviable third place in the UK, and having delivered the textbook illustration of the dangers of complacency by losing its top dog ranking, it must constantly scrap with rivals from above and below. Unlike Tesco (LSE: TSCO), there's no international expansion story -- Sainsbury sold its U.S. subsidiary years ago. And while Sainsbury's £7.5 billion property portfolio underwrites the share price, there's no prospect of an upward revaluation there for years. Besides, if you want to bet on commercial property there are much purer plays around after the turmoil of the past 18 months.
Without any enduring 'moat', investing in Sainsbury means backing its management to wring more profits out of the core operation while expanding floor space, non-food and online sales.
Yet the dream team that reversed its declining fortunes has already split following chairman Sir Philip Hampton's departure to rescue RBS. Sainsbury's CEO Justin King is only 48, but it's surely only a matter of time before he too is lured away.
None of this might matter if Sainsbury was cheaply rated, but it isn't. According to Digital Look data, Sainsbury shares currently trade at around 15.5 times forecast earnings for 2009-10, against 12 for Tesco and around 14 for Morrison (LSE: MRW).
Its very comfortable debt situation probably accounts for some of the differential with Tesco (Sainsbury's doesn’t need to renew its financing until 2018) but it still looks relatively expensive given those rivals are also reporting earnings growth.
Having bought Sainsbury at an average price of 284p as its recovery commenced, I'm currently 20% up but regret not selling on bid speculation in 2007. Sainsbury is currently a very well-run company and has been good to hold through the crisis, but I also own Tesco shares and prefer the latter's long-term outlook due to its international growth.
With so many beaten down shares about, it's hard to justify holding Sainsbury. Next time I come across an attractive looking share, I may well sell pricey Sainsbury to buy it.
More from Owain Bennallack:
Owain owns shares in Tesco and Sainsbury.
