We shop more there than ever, but profits are merely back to 2003 levels.
If you wanted a case study of how staggeringly competitive UK retailing is, then you could a lot worse than consider Sainsbury (LSE: SBRY).
And you don't even have to go all the way back to its downfall in the 1990s, when Tesco (LSE: TSCO) finally overtook its 150-year old rival to become the UK's biggest grocer. You just need to consider the reign of Sainsbury's CEO Justin King.
Long lives the King
King took up tenure as CEO in 2004, in the face of a shareholder revolt over the previous boss, pay and bonuses, and a catastrophic new distribution system. In October he unveiled a grand three-year plan entitled 'Making Sainsbury's Great Again'.
Seven years on, and Wednesday's full-year results for 2010 still highlights a list of bullet points marking progress along the 'Making Sainsbury's Great Again' trail.
Sales have soared over King's tenure, too, with turnover rising from £15.3 billion for 2003 to very nearly £23 billion in the 12 months to March 19 this year. Sainsbury now puts 21 million sales through its tills each week -- one million more than last year and an all-time high.
So is Sainsbury great again? Sure, unless you consider profits. Underlying profit before tax is up 9% year-on-year to £665 million for 2010. But that's £2 million short of the profits it racked up back in 2003!
Yielding income
On a statutory level, Sainsbury's profits for 2010 are almost 13% up to £827 million, which is a little better than the City expected.
The full-year dividend is higher, too, with the annual payout raised 6.3% to 15.1p. The dividend is covered 1.75 times by earnings per share, which were up almost 11% to 26.5p.
Those earnings put Sainsbury on a trailing P/E of 13.2, inching down to 13 for the year ahead on prospects of meager 3% growth. The picture is of a lot of fuss and bother, for very little reward for shareholders, other than that attractive 4.3% dividend yield.
Marginally worse
Harsh? Just compare Sainsbury's ability to generate profit from those 21 million weekly customers against Tesco's, as revealed in the latter's recent full-year results.
Tesco posted sales of £67.6 billion, and underlying profit before tax of £3.8 billion, for margins of 5.6%. The same calculation for Sainsbury's yields a margin of merely 2.9%.
Now, there are lots of ways in which to measure margins, and Sainsbury executives would surely point to differences in the capital structures of the two companies, their property portfolios, the way Tesco is really financing its expensive rapid overseas expansion, and so on.
But I don't think any tweaks would change the basic message. Market leader Tesco is a formidable profit machine, while Sainsbury, third-place after ASDA, is running to keep up.
Given this disparity, you might wonder why Sainsbury is on a forward P/E of 13, and Tesco on a lowly 11?
Me too. Perhaps the Sainsbury's premium is due to takeover speculation that previously sent its share price up to nearly £6 back in 2007. Valued at £6.7 billion, Sainsbury is a digestible morsel for any predator crazy enough to want to enter the tooth-and-claw fight for UK shoppers. £33 billion Tesco is not.
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Spaced out
None of this is to say that King and his team aren't working hard to get the results they are achieving.
Non-food growth is proceeding at a great clip (albeit it from a low base), expanding three times faster than more traditional grocery fare. Sainsbury's smaller convenience stores have achieved scale, too, and are now a £1 billion business in their own right.
Sainsbury also added 1.5 million square foot of store space this year, which puts it ahead of its target to expand by 15% over two years, although personally I'm unconvinced the UK needs more supermarkets.
On that note, it's worth mentioning that Sainsbury now puts the value of its property portfolio at £10.5 billion, which is £0.7 billion higher than last year and an attractive asset set against the company's £6.7 billion market capitalization.
Given that supermarkets need, well, supermarket stores, I'd see it more as downside protection to the share price (currently 335p) than as hidden value to be unlocked, though.
Buffeted shareholders
As a shopper, Sainsbury has improved out-of-sight since 2003. I well remember the empty shelves at my local Hammersmith branch. At times it was more like a scene from the former Soviet Union than a modern supermarket operating in the most innovative retail market in the world.
But for shareholders who've been buffeted by everything from a 40% cut in its dividend in 2004 to multiple takeover bids, it's been a more ambiguous journey.
Sainsbury is a simple and understandable business on one hand -- the sort of firm that Warren Buffett would look for. Yet Buffett is actually a major shareholder in Tesco, which says it all.
For defensive investors who don't mind holding two supermarkets and are mainly after income, Sainsbury is a perfectly reasonable company to own. You might be surprised with a fancily priced takeover someday, too.
But given the fearsome competitiveness in the UK, Sainsbury's lack of overseas expansion options, and the backdrop of a sustained squeeze on household budgets -- as well as my holding of Tesco shares -- I won't be rushing to buy its shares for any reason other than taking evasive action in some rockier stock market of tomorrow.
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> Owain owns shares in Tesco, as does The Motley Fool. Check out our Foolish disclosure policy.
