Supermarket results tend to focus on two figures: total sales, and like-for-like sales, which refers to sales from stores that have been open at least one year.
If supermarkets only operated superstores, then this would be enough — but they don’t. Tesco (LSE: TSCO) and J Sainsbury (LSE: SBRY) both get a significant and growing share of their revenue from convenience stores and online sales.
For example, Sainsbury’s convenience sales grew by 19% last year, while Tesco’s online sales rose by 11%.
The problem
Unfortunately, we don’t really know how much of each company’s sales and profits come from these channels, because neither supermarket breaks this information out clearly in its financial results.
In my view, that’s a problem: superstore sales are falling, while convenience and online sales are rising.
It’s pretty safe to assume that without these two growth channels, total sales would be falling even faster than they already are.
What do we know?
Tesco and Sainsbury do occasionally release snippets of information about their online and convenience operations. Here’s what I’ve been able to find from the last 12 months:
|
Tesco |
Sainsbury |
|
|
Convenience store sales |
??? |
Approx. £2bn |
|
Online grocery sales |
£2.5bn+ |
£1bn+ |
|
% of total UK sales |
5.2% (online) 17% (estimate of online + convenience) |
11.5% |
I’ve not managed to find any Tesco figures for convenience store sales, but we do know that Tesco has around 3 times as many convenience stores as Sainsbury.
If we assume sales from each company’s convenience stores are similar, then Tesco’s convenience sales could total around £6bn per year — equivalent to around 12% of total UK sales.
It’s clear that both convenience store and online sales now form a significant part of each supermarket’s annual sales — probably 10-15% per year. However, with one exception, investors in both firms have no real idea how much profit each of these key channels contributes.
The only clue we have came from Tesco, last year, when the firm said in a presentation that its online operation had generated £127m of trading profit on £2.5bn of sales, suggesting a healthy 5% trading margin.
What happens next?
Both firms’ reluctance to provide this information suggests to me that it wouldn’t make pleasant reading.
Despite this, it’s increasingly obvious to me that it is the combination of online shopping, supermarkets and convenience stores that will enable Tesco and Sainsbury to protect their market share and begin to recover.
Although there might be more bad news to come, I rate both stocks as a long-term buy.
However, Tesco has cancelled its final dividend this year, and Sainsbury’s dividend is expected to fall by 37% over the next couple of years.
