A quarterly fall in like-for-like sales of 3.9% (including fuel) may not sound like such a great result. After all, the corresponding quarter from last financial year was also a tough one for J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US). However, it represents a slight improvement over the first half of the year, but yet still equates to the company’s worst performance during the Christmas period for a decade.
A key reason for this is food price deflation, which J Sainsbury warns is likely to continue during the remainder of the financial year. Evidence of this can be seen in the fact that J Sainsbury reduced over 1,000 product prices in the run up to Christmas, with a £150 million investment in pricing helping to boost sales (but not margins) in the most recent quarter.
One major positive for J Sainsbury is the sales growth of its convenience stores, which experienced an increase of 16% in their top line during the quarter. And, with 25 new convenience stores being opened in the quarter, this could help to offset (to an extent) the declining sales of J Sainsbury’s larger stores moving forward. In addition, clothing and general merchandise continues to deliver better sales growth than food, with J Sainsbury’s clothing business increasing its top line by 10% year-on-year.
As mentioned, J Sainsbury expects food price deflation to continue for the foreseeable future, which is clearly not good news for the company’s bottom line. That said, the market seems to be anticipating such a situation, since J Sainsbury’s share price is flat at the time of writing and its shares trade on a relatively low valuation, which indicates that more challenging quarters are being priced in.
For example, J Sainsbury trades on a forward price to earnings (P/E) ratio of just 10.3, which takes into account next year’s expected fall in profit of 21%. This represents a 30% discount to the FTSE 100’s P/E ratio of 14.2 and, alongside a dividend yield of 4.7%, indicates that there is good value on offer and that J Sainsbury could prove to be a sound long-term buy.
Certainly, pricing pressure looks set to continue during 2015, but with disposable incomes set to rise in real terms in the UK this year, consumer spending could increase and help to improve J Sainsbury’s top and bottom lines over the medium term. As a result, and while trading conditions look set to remain challenging in the short run, J Sainsbury could prove to be worth buying at the present time.
