The big question for Sainsbury’s (LSE: SBRY) shares at the moment is inflation. While CPI has been running at around 10% for a while now, the March 2023 inflation for food and non-alcoholic beverages was up at a scarcely believable 19.2%.
The supermarket’s response has been to spend £560m keeping its prices lower so they don’t lose market share. It seems to be working as grocery sales are up 3%.
In fact, a May 10 Which? survey revealed its ‘average basket price’ was the cheapest of the ‘big four’ supermarkets.
The downside is that preliminary results for 2023 show that profits are down 5% and earnings per share are down 9%.
A 61% climb
Despite lower profits, Sainsbury’s shares have climbed 61% since last October. That’s a huge jump for a company that has traded sideways for the last 30 years.
Firstly, I suspect investors like the ‘defensive’ nature of supermarkets during the cost-of-living crisis. Food will likely be the last thing shoppers cut out of their budgets.
Better than Tesco
But Tesco, the other publicly traded UK supermarket, is up around 35%, a good deal lower than Sainsbury’s. So why is that?
Well, a terrific 4.73% dividend yield must help. It’s higher than Tesco at 4.07% and the FTSE 100 average of around 3.50% which makes it a nice income source while the markets aren’t doing so well.
Another important reason is that at the end of 2022, Sainsbury’s looked undervalued with a price-to-earnings ratio of 8.1 compared to Tesco’s 14.5.
Looking ahead
Since then, lowered earnings and a higher share price have bumped up the orange supermarket’s P/E ratio to 33.8, which makes it look a much more expensive buy.
And looking ahead, the firm will have to manage an operating margin that dropped from 3.4% to 3% last year. The question I’m wondering is how long can it go on subsidising its customers’ food shop before it affects the share price?
Another risk for the future is the threat of budget supermarkets like Aldi and Lidl, who have already eaten into Sainsbury’s market share since 2017.
| Tesco | Sainsbury’s | Asda | Morrison’s | Aldi | Lidl | |
| Market share (Dec ‘22) | 28% | 15% | 14% | 9% | 9% | 7% |
| Market share (Dec ‘17) | 28% | 16% | 15% | 11% | 7% | 5% |
But it’s not all bad news. Its Nectar card users have grown to 18m and the most active shoppers are saving £200 a year with it. That brand loyalty might be a useful tailwind.
If I had £1,000
Taking it all in, would I invest in Sainsbury’s if I had a spare £1,000 right now? Honestly, probably not. The company seems strong and heading in the right direction, but the price is a little high for me to think there’s really good value here at the moment.
