Congratulations are in order for the Justin King, chief executive at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US), who has just survived the “toughest Christmas” in his 30-year retail career.
Sainsbury’s longstanding run of unbroken quarterly growth also just survived. After a wafer-thin 0.2% rise in like-for-like sales in the 14 weeks to 4 January, the supermarket can now claim to an impressive 36 consecutive quarters of growth. Many in the City thought that record would finally fall, but it survived by the skin of its teeth. Can it do it again next quarter?
Christmas was tough for all the supermarkets, but Sainsbury’s did notably better than rivals Tesco, which suffered a 2.4% drop in like-for-like sales, and Morrisons, which suffered a 5.6% drop.
That’s no surprise, Sainsbury’s has been winning the big four supermarket sweep for years. But it faces some major challenges. Sainsbury’s risks being squeezed between premium rival Waitrose and discounters Aldi and Lidl, who all enjoyed a dream Christmas.
It also faces an even bigger threat from the internet, as online grocery sales spiral. It also has to adapt to the end of the supermarket space race. Having a national chain of outsize stores looks more of a cost than a benefit, as Tesco effectively admitted, when it recently shelved plans to build 100 new superstores. Just look at how Morrison’s share price leaped 6.5% in the day as it indicated that it was looking to sell off some of its property portfolio.
Think Local
It is encouraging to see Sainsbury’s tackle these threats, however, posting a 10% rise in online sales, and an 18% rise in convenience store sales, helped by a £7 million splurge on Christmas Eve alone, as panicky shoppers surged to their Sainsbury’s Local for last-minute salvation. It has had other successes, recently posting a 10% rise in sales of its own-brand food Taste the Difference.
It is now the six largest retailer of homeware by value and the UK’s 11th largest clothing retailer (it somehow managed to sell 300,000 of those hideous ‘onesies’ in the last quarter alone — yuk!). Sainsbury’s is also setting up its own mobile phone network, via a link-up with Vodafone.
I still expect the next quarter to be a tough one. Consumers are short of cash, the recovery has yet to hit most people’s pockets, government cuts are kicking in. Tesco, which still boasts 30% market share despite its troubles, is launching a spirited £1 billion fightback. The sector may also face a wider decline, as consumer habits change. And despite its successes, Sainsbury’s has been an underwhelming investment. It may have been the best of the big four over the past five years, but its share price is up a measly 9% in that time, against 37% for the FTSE 100 as whole.
Sell-by date looms
Sainsbury’s growth prospects also seem to be flattening out. A 9% rise in earnings per share in the year to March 2013 is forecast to dip to around 5% a year over the next three years. King recently cut his full-year sales guidance, predicting sales will increase by less than 1% this financial year, down from his previous forecast of between 1% and 1.5%. Trading at 11.4 times earnings, some of these worries are reflected in the price. But that price could fall even lower if Sainsbury’s does, as I suspect, fail to stretch its growth record to 37 consecutive quarters.
