Shares in Sainsbury’s (LSE: SBRY) have made an excellent start to the year and are already up more than twice as much as the FTSE 100. In fact, they have risen by 8% year-to-date, while the FTSE is up by 4%. Looking ahead, there could be more outperformance to come. Here’s why.
A New Pricing Strategy
Regular shoppers at Sainsbury’s may have noticed that in recent months it has excluded Tesco from its price match coupon campaign. Of course, your groceries are still matched against Asda, but Sainsbury’s is gradually moving away from the supermarket price war that has characterised the last few years, as it seeks to expand margins through what it is calling ‘regular pricing’.
This is a key development for the company, as it appears to be one step ahead of its rivals. In fact, just as it was the first to price match against rivals, Sainsbury’s is the first supermarket to ditch competing solely on price, and instead try to trade on its consistent value and high levels of customer service.
This could be a very prudent move by Sainsbury’s, because it has been timed to coincide with a UK consumer that is now seeing an increase in disposable income (in real terms) for the first time in around seven years. As such, during the course of 2015, Sainsbury’s could be the surprise package in the supermarket space, as shoppers become less concerned with price and more interested in trying new products and shopping in a more appealing environment.
Looking Ahead
Clearly, the short term may be somewhat challenging for Sainsbury’s, even though its medium term future seems to be very bright. After all, there is still a very high level of competition among UK supermarkets. However, Sainsbury’s current valuation appears to adequately take that into account, since it offers a significant margin of safety at the present time.
For example, Sainsbury’s has a price to book (P/B) ratio of just 0.8. That’s difficult to justify when you consider that its balance sheet has only moderate levels of debt and contains significant amounts of cash and property, plant and equipment. Furthermore, Sainsbury’s remains highly profitable and is expected to start to see a stabilisation of its bottom line in financial year 2017.
So, while the market is understandably more interested in the new CEO at Morrisons and how Tesco is going to change its business model, Sainsbury’s could turn out to be the most promising, if understated, supermarket in the UK. As such, it would not be a major surprise for its outperformance of the FTSE 100 to continue – especially over the medium to long term.
