First-Half Results Should Cement J Sainsbury plc’s Top Position

J Sainsbury (LSE: SBRY) is our best supermarket investment right now, I reckon.

The days when they could all whack high margins on their products and play the premium retailer part are gone, and we’re firmly back to a Lidl-led era of lower prices (and thinner rewards for shareholders), and we just have to get used to it.

But there is some upmarket middle-ground left, and it has traditionally been Sainsbury’s turf — and I can see it staying that way.

Earnings fall this year

We are looking at forecasts for a 16% fall in earnings per share (EPS) for the year to March 2015, but Sainsbury’s does have to take its fair share of the punishment — targeting a more upmarket demographic does not make it immune to competition or avoid the need for more price competitiveness.

First-half results due on Wednesday 12 November should put some flesh on the bones of today’s forecasts, and at the beginning of October we did hear that Sainsbury’s saw ex-fuel like-for-like retail sales slip 2.8% in the second quarter, and down 2.1% over the half.

The “deflationary environment” is certainly hitting, and Sainsbury’s response is to price-match on brands with Asda — but that still leaves room for higher-margin brands not carried by Asda, and for non-branded products like fresh meat and vegetables.

More awards

And set against the squeeze, Sainsbury’s keeps on winning awards — at the end of September it picked up five more at the Retail Industry Awards, and also added the “In-store bakery of the year” title at the Bakery Industry Awards to its collection.

Things like that count in the battle to attract the better-heeled shopper, and I think Sainsbury’s will be able to pull ahead of the sector over the next couple of years. We already have a smaller EPS fall on the cards for March 2016, of 7%. And forecast dividends are still high at more than 5% and covered around twice by earnings — there’s enough leeway there for a dividend cut while still remaining ahead of the competition.


To top it off, with the price having dropped 40% in the past 12 months to 241p, the shares are on forward P/E ratios of under 10 for the next two years, which I don’t see as stretching even in these tough times.

But first things first, and hopefully nothing disappointing next Wednesday.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.