I’m working my way through the annual reports of your favourite FTSE 100 companies, looking for insights into their businesses. Today, it’s the turn of J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).
Like-for-(not-quite)-like sales
Sainsbury’s has been trumpeting impressive like-for-like sales growth in the leading highlights of its results and trading updates for a long time now. Within its annual report, management was able to boast about “33 consecutive quarters of like-for-like sales growth”, and like-for-likes for the year up 1.8% on the previous year.
However, digging deeper into the report, we find that like-for-like sales are actually like-for-(not-quite)-like. Sainsbury’s includes store ‘replacements’ and ‘extensions’ within its like-for-like measure. This means that sales in stores that have been extended are deemed ‘like-for-like’ with the previous year’s sales from less floor space.
Store replacements and extensions contributed 0.7% to the 1.8% like-for-like sales increase Sainsbury’s highlighted at the start of its report. The company flatters itself with its headline number.
Margins
Supermarkets are low-margin businesses, but Sainsbury’s margins struck me as being particularly tight. I checked out the company’s operating margin against Footsie peers Tesco and Morrison’s.
| 2011 (%) | 2012 (%) | 2013 (%) | |
| Sainsbury’s | 3.4 | 3.5 | 3.4 |
| Tesco | 5.0 | 4.9 | 6.0 |
| Morrison’s | 5.5 | 5.6 | 5.3 |
Source: Morningstar
Tesco’s margin benefits from economies of scale due to its sheer size, while Morrison’s benefits from ‘farm-to-fork’ vertical integration. Sainsbury’s markedly lower margin suggests it would be more vulnerable than its peers in the event of a serious price war within the sector.
Alignment of director and shareholder interests
Executive pay and bonuses have come under scrutiny in recent years. Increasingly, shareholders have been looking to align directors’ interests with their own. One way of doing this is to require directors to own shares in the company.
The table below shows the shareholding requirements for Sainsbury’s key executives compared with Tesco.
| CEO shareholding (times salary) | CFO shareholding (times salary) | |
| Sainsbury’s | 2.5 | 1.5 |
| Tesco | 4.0 | 3.0 |
Sainsbury’s alignment of directors’ interests with shareholders’ interests falls some way short of best-in-class Tesco.
Overall, I’m not too impressed by the things I learned from reading Sainsbury’s annual report. While there’s been good momentum in the business in recent years, I’m not convinced the company’s premium price-to-earnings ratio of 11.5 over Tesco’s 10.7 and Morrison’s 10.5 makes for particularly good long-term value.
