Sainsbury’s is taking on discount supermarkets – should you buy in?
Sainsbury’s has teamed up with Netto to try to beat the discount supermarkets at their own game. Ed Bowsher looks at what’s going on, and whether you should buy in.
The big four' supermarkets have had a rotten year.
All four have been seriously damaged by the up-and-coming discounters', Aldi and Lidl.
So I was intrigued to read that Sainsbury's new boss has decided to adopt a "if you can't beat em, join'em" strategy. Sainsbury's is taking a 50% stake in a new discount chain for the UK.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As I say, it's an intriguing move, and I've been thinking a lot about its implications over the last couple of days. I've even considered buying some shares in Sainsbury's, but in the end, I've decided to hold off. When I look at Sainsbury's, there still plenty to worry about.
What exactly is Sainsbury's doing?
Sainsbury's
The idea is that it should enable Sainsbury's to get some exposure to the fast-growing discount sector without damaging the mildly upmarket Sainsbury's brand.
What do I think?
I also highlighted two serious problems for all big four' supermarket players. First, there's the pressure from the discounters at the bottom end of the market and from Waitrose at the top end. And second, there are now too many large out-of-town stores that are no longer so popular with shoppers.
Sadly, when you look at Sainsbury's recent full-year results, things haven't improved much. Like-for-like sales have edged up by a paltry 0.2% while the operating margin has fallen to 3.33%. The company's statement also made a big fuss about a 10.4% return on capital employed (ROCE)as though this was a great achievement. I guess it's not too bad for a supermarket chain but it certainly doesn't trigger any enthusiasm on my part.
As for the Netto deal, I admit that I was impressed when I first read about it. However, I do worry that it may be a distraction for management, and I was also put off by one comment on the deal in the Telegraph.
David McCarthy at HSBC told The Telegraph: "We find the move by Sainsbury's perplexing, and it will help further highlight how expensive the supermarkets are relative to the discounters.
"This was a problem in France for many years and it is only recently that the hypermarkets there have realised that the way to win is not by imitating the discounters with their own chains but by being more price competitive."
In other words, Sainsbury's needs to improve the offer in its core stores, not set up a separate discount chain. That's the only way to fight off the threat from the discounters and ensure that like-for-like sales can start to pick up again.
The valuation looks tempting
Since I wrote my last article on the supermarket chain in January, the share price has fallen by roughly 10% to 316p. Earnings per sharelast year were 32.8p, so Sainsbury's is now on a price/earnings ratio (PE)of only 9.6. Most analysts expect profits to fall next year, but the P/E ratio will probably still be below 11.
What's more, the dividend yieldis a very healthy 5.5%. In a market where many shares are trading on very high ratings, those are tempting numbers.
Sainsbury's is also making progress online, and 15% of its sales now originate on the web.
But, as I said, I'm holding off for now. These days, my only retail share is Next (LSE: NXT), and that's not going to change just yet. (I think that Next is still worth buying now.)
With Sainsbury's, I worry that there is more bad news to come for the supermarket sector, and more specifically, I think that Sainsbury's has more work to do. It needs to focus on its core stores and try to push up its margins.
If the price falls further, I might be tempted to buy. But I'm not prepared to pay 316p when the chain still faces serious challenges.
Our recommended articles for today
The 14 investments our experts would buy into now
How might QE in Europe affect markets? And where should investors look for profits? John Stepek talks to our panel of experts to find out what they're buying.
What's next for our big lithium play?
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Ed has been a private investor since the mid-90s and has worked as a financial journalist since 2000. He's been employed by several investment websites including Citywire, breakingviews and The Motley Fool, where he was UK editor.
Ed mainly invests in technology shares, pharmaceuticals and smaller companies. He's also a big fan of investment trusts.
Away from work, Ed is a keen theatre goer and loves all things Canadian.
Follow Ed on Twitter
-
Top global fintech companies to invest in
One British fintech hogs the headlines, but there are two top performers in the US. We explain where you should put your money
By David C. Stevenson Published
-
Japan’s new PM Shigeru Ishiba calls snap election – why now?
The new leader, Shigeru Ishiba, has called a snap election seeking a new mandate just three days into his post. What does this mean for the country's economy?
By Emily Hohler Published
-
How to profit from rising food prices: which stocks should you invest in?
Tips Food prices are rising – we look at the stocks to avoid and the one to invest in this sector.
By Bruce Packard Published
-
Sainsbury’s bags Asda in £7.3bn deal
Features A merged Sainsbury's and Asda would pose a powerful joint challenge to Tesco. But the deal raises serious competition concerns. Alex Rankine reports.
By Alex Rankine Published
-
What the merger between Sainsbury’s and Asda means for you
Features Sainsbury’s and Asda have decided to merge. John Stepek looks what it means for the troubled UK supermarket sector and asks: is it a good deal?
By John Stepek Published
-
Britain’s convenience store battle
Features Sainsbury’s has bid £130m to buy Nisa, the mutually owned consortium of more than 1,300 independent retailers, which operates 3,000 small shops.
By Ben Judge Published
-
The ten most-hated shares in the FTSE
Features These are London’s ten most-hated shares, judged by the percentage of stock being shorted.
By Andrew Van Sickle Published
-
Not such a Merry Christmas for supermarkets
News The festive period provided no let up for the beleaguered supermarket sector.
By Andrew Van Sickle Published
-
Controversy of the day: Will Sainsbury’s fall next in the Great Supermarket Wars?
Features Sainsbury's saw its first fall in Christmas sales for a decade. Is it about to suffer the same fate as Tesco?
By Mischa Frankl-Duval Published
-
FTSE 100 ahead as eurozone succumbs to deflation
Market Reports Falling prices in the eurozone have heaped yet more pressure on central bank boss Mario Draghi to turn on the money taps.
By Kam Patel Published