Should investors be shopping for income at Sainsbury?

A tail of woe in the supermarket sector

UK Food Retailers have been battered of late - the main culprits being:

• The lack of UK households' purchasing power, with inflation consistently running ahead of wage growth;
• The rise and rise of German food discount chains Aldi and Lidl

This has led to savage drops in share prices in the sector as investors have worried over the resultant combination of increasing price pressures and losses of market share: Tesco (code TSCO.L) has fallen from 378p in September last year to just 302p currently; Wm. Morrison (MRW.L) has slid from 303p back then to just 204p now; and Sainsbury (SBRY.L) has tumbled to 337p today from 410p in November 2013.

Why Sainsbury? Hasn't sales growth been falling?

Analysts will point to slowing like-for-like sales growth (comparing only the sales at stores that have been open at least 1 year) at Sainsbury as a real cause for concern; in the year to March 2014, it is true that Sainsbury only managed yearly like-for-like sales growth of 0.2%, the lowest for 9 years. Overall sales growth slowed to 2.7% in this latest year, again the slowest growth rate recorded since 2004 (Figure 1).

1. Sainsbury See Slowing Growth But Higher Profit Margins

Source: Company reports

But note also from Figure 1 that Sainsbury's overall profitability, as measured by operating profit margins, has continued to rise to 4.2%, a level of profitability not seen since the year 2000! So despite the pressures from the discounters, Sainsbury is managing to squeeze out better profitability year by year, unlike the falling profit margins at Tesco, Morrisons and even Wal-Mart (US owner of Asda).

And retail sales could be getting better...

Moreover, April retail sales in the UK (excluding petrol and diesel sales) posted a surprising jump today of 1.8% over the month of March, and a sizeable 7.7% yearly growth rate when compared with April last year. In fact, retail sales over the last three months are now rising at their fastest rate for a decade! So there may be some relief for supermarkets to come. Indeed, excluding April 2011 (the Royal Wedding), food sales in April rose at the fastest pace since records began in 1988...

There's value to be had

Sainsbury stands up well on a raft of value metrics too: at the current 337p share price, it trades on 11x prospective P/E and a price/book value ratio of 1.0x. So yes there may not be a huge amount of growth to be had at present, but I would suggest that this fact is already more than adequately reflected in these lowly valuation multiples. And yet, Sainsbury's underlying book value per share (an accounting measure of company value) continues to grow steadily (Figure 2) to stand today at 320p, while the net profitability earned on this equity continues to rise, hitting over 12% as of March 2014.

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