Yahoo Finance Questor: Don’t let this supermarket’s results put you off
Recently released annual results from Sainsbury’s hardly set the world alight. The FTSE 100-listed retailer generated a rather humdrum 3.4pc rise in sales and a paltry 1.6pc increase in pre-tax profits in the financial year to March 2024.
However, in Questor’s view, the company’s results were impressive given the sorry state of the UK economy. Indeed, the economy is currently struggling out of a recession and has posted anaemic growth, at best, since mid-2022. Inflation, meanwhile, remains 120 basis points above the Bank of England’s target, and interest rates stand at a 16-year high after being hiked by over 500 basis points in less than two years.
All of this means consumers have experienced a significant cost-of-living crisis that has put tremendous pressure on their disposable incomes. Therefore, Sainsbury’s modest rise in sales and profits is a better result than may appear at first glance.
Crucially, the company will almost certainly experience improved operating conditions over the coming years. Inflation will ultimately fall to the Bank of England’s 2pc target as time lags eventually pass, thereby allowing the central bank to implement a more accommodative monetary policy in order to stimulate economic growth.
This should not only act as a positive catalyst on the company’s financial performance, but also prompt investors to adopt an increasingly risk-on attitude that, in turn, equates to a rise in demand for shares in UK-focused retailers. This should help to push their prices even higher.
In the meantime, the company’s results showed that it remains financially sound. Net debt declined by £790m versus the prior year so that it now stands at £5.6bn. This means the firm has a net gearing ratio of 81pc which, when combined with net interest cover in excess of three, is sufficient to allow it to reinvest for future growth. Indeed, a strategy of improving its products and keeping prices low via significant investment that has totalled £780m over the past three years is proving to be simple but highly effective.
So, too, is an efficiency programme that has delivered £1.3bn in cost savings over the past three years. The company plans to cut a further £1bn of costs over the next three years, which should support margins and improve its competitiveness vis-à-vis sector peers after having already strengthened its market position in the most recent financial year. Sainsbury’s delivered record market share gains that not only evidence its strong performance but also highlight the challenges faced by highly leveraged sector peers that are likely to cede further ground.
A recently announced £200m share buyback programme seems sensible while its shares continue to trade at an attractive level. They currently have a price-to-earnings ratio of just 12.1, which suggests they offer a wide margin of safety for new investors.
Although annual dividends were unchanged versus the prior year, a yield of 4.9pc highlights the stock’s income appeal at a time when the FTSE 100 yields around 3.6pc. Dividend cover of 1.7, meanwhile, suggests that shareholder payouts have scope to rise as the company’s financial performance improves.
Of course, this column first advised readers to purchase shares in Sainsbury’s during March 2021. Since then, they have posted a 16pc capital gain and paid dividends amounting to 16pc of our notional purchase price. While a 32pc total return in just over three years is a rather modest performance on a standalone basis, it nevertheless represents a solid payback amid downbeat investor and consumer sentiment.
Clearly, some investors will remain unconvinced regarding the case for buying the retailer’s shares. Undoubtedly, the company is operating in a tough environment that could realistically take many months, or even several years, to dramatically improve.
However, in Questor’s opinion, a key characteristic of successful investors is being able to look beyond today’s operating environment and make a logical judgement on the long-term prospects for a particular company or industry.
In the case of Sainsbury’s, falling inflation, substantial interest rate cuts and a significantly improved economic outlook are simply not currently factored into its market valuation. When the retailer’s solid balance sheet, sound strategy and improving competitive position are additionally taken into account, its shares look even cheaper. Therefore, the company remains a worthwhile purchase on a long-term view.
Questor says: buy
Ticker: SBRY
Share price at close: 267.8p
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