Clearly, supermarkets like J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) are having a very tough time of it at the moment. They’re being squeezed by discount retailers such as Aldi and Lidl and have been relatively unsuccessful in attracting higher price point buyers, who seem to prefer Waitrose to J Sainsbury. As such, J Sainsbury’s share price has fallen by 18% over the last year, while the FTSE 100 is up almost 3% during the same time period.
Change Will Come
However, the future is unlikely to be the same as the past, which is why investors could be missing out on shares like J Sainsbury. That’s because we are still recovering from one of the deepest recessions in history, which has hit real incomes extremely hard through a mix of anaemic wage growth and above-average inflation. As such, individuals and families have sought out lower price options (such as Aldi and Lidl) and have made price a much more important factor in their decision-making.
In addition, shoppers have simply been buying less volume of food in an effort to cut their household expenditures. Pre-credit crunch, there appeared to be a different psyche and shoppers seemed happy to buy a little extra or add a luxury item or two to their shopping baskets. Due to continued improvements in the UK macroeconomic outlook, these circumstances should change and shoppers are likely to turn their attention away from the cheapest retailers towards better quality supermarkets that are still conscious of pricing. That’s why J Sainsbury could return to higher growth rates.
Hedging Its Bets
Of course, there could yet be a period of low-growth, or the transition back to old spending habits may take a little longer than anticipated. That’s why J Sainsbury has partnered up with Danish retailer, Netto, to offer a discount brand that means the J Sainsbury brand does not end up being purely price-driven. This move also allows J Sainsbury to continue to challenge the likes of Waitrose without needing to be overly concerned with discounting, which may not be as important to higher price point shoppers.
Great Value
While J Sainsbury is experiencing a tough period, its shares are a bargain. Indeed, they trade on a price to earnings (P/E) ratio of just 10.5. This is well below the FTSE 100 P/E of 13.9 and shows that J Sainsbury could see its valuation rise over the medium term. In addition, shares in the company offer a yield of 5.4% which, when combined with the potential for an upwards rerating in the stock, could deliver a healthy profit over the long run. A potent mix of capital growth and strong income levels could, therefore, help to pay off your mortgage.
