In recent hours I’ve lauded FTSE 100 giant Persimmon and explained why its share price could explode in November. So what about J Sainsbury (LSE: SBRY)? Is this also a terrific blue-chip buy ahead of interims scheduled for 7 November?
Well newsflow surrounding Britain’s second-largest supermarket chain has certainly been more pleasing of late, at least on a headline level. Kantar Worldpanel suggested that sales moved back into growth in the three months to 6 October, with revenues growing at the fastest rate since October 2018. The cherry on top: it was the only one of the established ‘Big Four’ operators to record any growth at all.
But dig a little deeper and there wasn’t that much to actually celebrate. First of all growth, clocked in at just 0.6%, and while this was the best result for a year it illustrates just how dreadful Sainsbury’s has been performing of late.
Secondly, Kantar’s data showed that earnings-destroying promotional activity across the entire sector rose for the first time in four-and-a-half years, driven mainly by the retailer’s ‘Price Lockdown’ initiative (as well as Tesco’s ‘100 Years of Value’ campaign).
And lastly, sales growth at Sainsbury’s continues to be overshadowed by that of Aldi and Lidl, stores where revenues rose 7.3% and 8.2% respectively. The German discounters are thriving in an environment of souring shopper spending budgets and steady expansion, and Kantar’s release underlined this – apparently Aldi attracted more new customers than any other chain and added 689,000 additional clients in the last 12-week period.
The pain train
That latest release from Kantar has done little to assuage City concerns that Sainsbury’s will see earnings fall yet again in the current fiscal year (to March 2020) – a 2% drop is currently predicted.
On the plus side, broker consensus suggests that a 2% earnings rise is in the offing for fiscal 2021 but I’m not buying it. Current polling ahead of the 12 December general election suggests another hung Parliament is around the corner. And what does this mean for Sainsbury’s and the broader retail sector? The possibility of further Brexit uncertainty, and subsequently weak consumer confidence, stretching well into the new year.
I touched upon the aggressive store-opening drive that Lidl and Aldi are currently engaged in, which will result in dozens more supermarkets being opened the length and breadth of the country in 2020 alone, and that will mean further rounds of aggressive discounting from the likes of Sainsbury’s.
But this is not the only reason for the Footsie firm to be quaking in its boots as speculation mounts that the foreign entrants could enter the critical online marketplace soon. Why? Last month Lidl posted an advert on its website seeking a digital project manager to help deliver “a new online platform with the aim of acquiring new customers and driving online sales.”
Cheap. But worth it?
Right now Sainsbury’s trades on a dirt-cheap forward price-to-earnings ratio of 10.5 times and carries a mighty 5.1% dividend yield for financial 2020. These attractive numbers aren’t enough to compel me to invest my hard-earned cash, though; the supermarket’s share price is down 35% over the past 12 months and there’s no obvious reason to expect it to break out of this downwards trend.
In fact, with those half-year financials just around the corner I reckon this the time for existing shareholders to sell up.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.