Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Share keeps on growing
The dual-effect that both budget and premium-brand supermarkets are having on the British grocery environment — most notably from the likes of Lidl and Waitrose — is well documented, with mid-tier rivals, including Sainsbury, forced to operate in an increasingly small space.
Still, Sainsbury has thus far managed to defy the enduring difficulties of competitors such as Tesco and Asda, and instead continues to grow market share. The latest Kantar Worldpanel stats showed Sainsbury’s share rise to 16.8% in the 12 weeks to October 28, up from 16.4% a year earlier.
Pressure on consumers mounts
But there is no doubt that pressure on customers’ wallets remains strong, and as the rate of inflation continues to outstrip pay rises the impact of lower-tier rivals could intensify further ahead.
Indeed, latest retail sales data released last week showed UK retail sales drop 0.7% in October from September levels. With sales performance continuing to fluctuate from month to month, a lack of clear recovery on the high street could whack Sainsbury further down the line.
Exciting growth areas keep delivering
But the supermarket’s rising expertise and exposure to red-hot retail areas should help it to insulate itself from broader weakness in the British retail, and more specifically grocery, landscape.
In particular, Sainsbury continues to pull up trees online, and last week’s interims revealed that sales here are outperforming the market with growth in excess of 15%. Revenues here are now running at more than £1bn on an annualised basis. As well, the firm is also ratcheting up its presence in the convenience store space — with approximately two new stores opened per week, sales in this division are rising at more than 20%.
No escaping supermarkets’ structural woes
However, a major structural problem affecting the entire supermarket space is the effect of rising rents and depreciation, a factor highlighted in Sainsbury’s interims this month.
The supermarket saw depreciation expenses rise to £277m during the 28 weeks to 28 September, up from £258m in the corresponding 2012 period. Furthermore, the book value of property, plant and equipment has slipped by some £14m since the turn of the year due to depreciation, sale and leasebacks, and the company made write-downs of £92m to the value of sites where it no longer intends to build a store.
A fantastic stock selection
But overall, I believe that Sainsbury is in great shape to keep on delivering steady sales growth. The firm has invested heavily in its multi-channel approach, in addition to improving the quality of its leading in-house brands and the price competitiveness of its products. In my opinion the retailer has just the right recipe to keep on growing.
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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.