Remember those far off days, before the banking crisis, before the Brexit vote, before the Tesco disaster? You know, back when J Sainsbury (LSE: SBRY) was seen as a little bit upmarket, a touch more prestigious than the supermarkets that most people shopped at?
Those days are long gone, and the Sainsbury’s crowd is just as likely to be seen in Lidl or Aldi now, grabbing stuff that I think is just as good but for significantly less money. It shows in Sainsbury’s record over the past few years, with forecasts suggesting EPS this year will have fallen 39% since 2014. And Wednesday’s Q2 update is in line with the expected flat full-year figures.
Structural changes
Total retail sales (excluding fuel) were up 0.1%, like-for-like down 0.2%, and sales of groceries were up 0.6%. But that takes a back seat, really, to structural plans aimed at reducing costs by around £500m over five years. Sainsbury’s Financial Services arm is following Tesco’s lead by stopping new mortgage sales, and there’s an aim of reducing its cost/income ratio to around 50% and reaching a point where it’s able to contribute net cash to the group.
On the stores front, a combination of closures and new openings looks set to not change overall numbers by very much, but the refocusing effect is expected to improve operating profit by around £20m per year. Closure costs and impairments should total around £230m to £270m, so it’ll take a while to reach break-even. I’m sure this kind of approach is what Sainsbury needs to get itself on a sounder cash footing, but I can’t help contrasting it with Aldi’s plans for investing £1bn to open a new supermarket in the UK each week, on average, over the next two years.
Sainsbury’s is predicting a £50m reduction in pre-tax profit for the half, due to a number of unfavourable comparisons with the same period last year. But the comparatives should shift the other way in the second half, and the company says that “while retail markets remain highly competitive and the consumer outlook remains uncertain, we remain on track to deliver full year 2019/20 underlying profit before tax in line with consensus expectations.”
Why I’m not buying
So, a flat year this year, probably something similar next year with a 2% EPS gain pencilled in by analysts, and a raft of structural changes that look like they’ll have a significant beneficial effect. So why am I not convinced that I should be buying the shares? After all, with a forward P/E of under 11 and 5% dividends on the cards, the shares look a more attractive proposition than Tesco’s on a multiple of 14.5 and set to yield around 3.5%.
The problem, really, is that Sainsbury’s is still very much in catch-up mode. Tesco got itself back to what looks like sustainable earnings growth three years ago, while such a milestone still isn’t on Sainsbury’s forecast horizon.
And, of course, Tesco itself isn’t close to catching up with the rate of growth from Aldi and Lidl that’s taking the groceries business by storm. I just think it’s a sector to steer completely clear of, especially when there are so many more attractive businesses out there.
