It’s a tough time for supermarkets at the moment. Indeed, Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) share price performance over the course of 2014 has reflected a highly competitive marketplace, where sales and profits are coming under ever-increasing pressure.
However, with news that it will partner with discount retailer, Netto, in a joint venture, could Sainsbury’s buck the supermarket trend and become a super growth stock?
Disappointing Growth Forecasts
Further evidence of how great the challenge facing supermarkets such as Sainsbury’s is can be seen in its growth forecasts for the next two years. In the current year, Sainsbury’s is expected to see earnings per share (EPS) fall by 10%, while next year it is set to deliver only marginal growth. The saving grace, though, could be the opportunity to leave the squeezed middle of the supermarket sector behind via the joint venture with Netto.
Indeed, there has been something of a three-tier market in the supermarket sector in recent years. The discount retailers, such as Aldi, have enjoyed huge success during a recessionary period when many households have sought the lowest prices and become far more savvy in their search. In addition, the upper market retailers, such as Waitrose, have continued to attract shoppers seeking quality in addition to good value.
Meanwhile, the midpoint of the market, which has included Sainsbury’s at its upper end, has lost customers to the discount retailers in particular and been forced to cut prices (and margins) in response. Sainsbury’s could now tap into the two more lucrative spaces within the supermarket sector and avoid the squeezed middle. In turn, this could allow the company to deliver improved earnings growth going forward.
Looking Ahead
Clearly, the deal with Netto is relatively new and it is difficult to say to what extent Sainsbury’s will be exposed to the discount sector. It does, though, appear to be a logical decision for the company and, although Sainsbury’s is not presently able to deliver strong growth prospects, it could turn out to be more than just a high-yielder in future years. Until then, investors in the stock can obtain a great yield of 5.2% and potentially see Sainsbury’s return to growth over the medium to long term.
