Sainsbury’s one-year performance had been disappointing. The company was initially purchased sometime mid-2015 in my portfolio, and had performed badly (especially in the most recent quarter) when compared to the S&P 500. According to Bloomberg data, Sainsbury’s American Depositary Receipt (ADR) shares had given negative 20% year-to-date (YTD), and negative 24.95% in the past year.
“We are a grocer at heart, with growing businesses in general merchandise, clothing, convenience, financial services and online”
Sainsbury’s CEO Mike Coupe
Sainsbury’s
Sainsbury’s was founded 145 years ago by John James Sainsbury and his wife Mary Ann Sainsbury in London. The company started out selling just salted butter, and had now grown into one of the United Kingdom’s largest retailers.
According to the company’s statements, Sainsbury’s operates over 1,200 supermarkets and convenience stores and an online grocery and general merchandise operation in the United Kingdom. It also has two property joint ventures with Land Securities Group Plc and The British Land Company Plc. Further, the company also provides a range of quality banking and insurance products through its (own) Sainsbury’s Bank.
Further, the company also conducts business online, and operates to other business segments namely Sainsbury's Entertainment and Sainsbury's Energy that were recently founded in 2010 and 2011, respectively.
Brexit
The Brexit aftermath seemed not to play out to the bears’ content, so far. Since June 24, S&P 500 returned a positive 8%, while the Sainsbury’s ADR shares returned negative 0.98%. As of July 17, the S&P500 has a price-to-earnings (pe) ratio of 24.85 times, compared to its multiple a year ago of 21 times.
Sainsbury’s business operations coming off from the Brexit remained a bit questionable. This uncertainty rose from investors’ concern secondary to Sainsbury’s recent £1.4 Bil ($2.01 Bil) takeover of Home Retail Group. Sainsbury’s offered a 74% premium to Home Retail Group’s shares when it began a bidding war with another acquirer sometime in January this year. Home Retail Group is focused on its retailer Argos, which sells furniture, electronics and many other items. Sainsbury expects the move to generate savings of £160 million and one-off costs of £130 million.
“The combined business will offer a multi-product, multichannel proposition, with fast delivery networks, which we believe will be very attractive to customers and which will create value to both sets of shareholders,” Sainsbury’s Chairman David Tyler.
Post-Brexit, CEO Mike Coupe had this following statement to say about the acquisition, “We remain absolutely convinced by the strategic rationale of the deal and we remain committed to making that happen.”
Analysts say that Argos’ sales may suffer secondary to the recent multi-decade low of the British pound. Higher import costs for the UK retailer would lead to lower margins. Further, Bernstein said that if there was a 5% slump in same-store sales at Argos or a 1% fall in gross margins; operating profits would halve from £83m to £41m. A significant and worrisome picture.
According to the Journal, Argos had already lowered its fiscal 2016 guidance even prior to the Brexit. Further, the furniture-electronics dealer also experienced a negative 2.6% in comparable sales at Argos for the year ended Feb. 27. Currently, Argos shareholders are expected to vote on the acquisition deal on July 27, and the UK’s competition watchdog has yet to give its approval.
Dividend
According to Gurufocus data, Sainsbury’s ADR shares are currently yielding 5.42% with a payout ratio of 54%, and a five-year growth rate of 4.5%. These, combined with the company’s low valuations provide an attractive offer to yield-hungry investors.
Cash Flow
In 2015, Sainsbury’s paid £621 Mil to lower its outstanding debt, but took in £674 Mil in long-term debt in the same year. In the past five years (2011 to 2015), the company had four years of negative free cash flow except in 2014.
Sales and Profits
According to the company’s recent annual filing, retail sales contributed 98% of its total sales; total sales for Sainsbury’s grew negative 0.73%. The company was able to exhibit amazing growth in its financial services. Financial services grew 1,136% growth in fiscal year 2015, from £25 Mil to £309 Mil.
Despite this minimally weak growth in sales, Sainsbury’s actually delivered losses in the fiscal year. The company had negative £166 Mil in losses. These losses were mostly brought by Sainsbury’s one-off non-cash impairment charge of £628 Mil. According to its filing, Sainsbury’s had to write off its unprofitable and marginally profitable stores and onerous lease provisions.
(One-off items, p. 44 in recent Sainsbury’s annual filing)
Sainsbury’s closure of less profitable grocery stores came from increasing competition in the business segment. Growing competition from discount stores Aldi and Lidl had taken market share and hurt the grocery stalwarts, such as Tesco, WM Morrison, Wal-Mart’s Asda, and Sainsbury’s.
Despite these store closures, Sainsbury’s still ended up with 101 more stores in fiscal year 2015 bringing its total store count to 1,304.
(Grocery Market Share in Great Britain, Kantar World Panel)
Cash, Debt and Book Value
According to Gurufocus data, Sainsbury’s had £2 Bil in cash, with £3.86 Bil in debt outstanding in its September 2015 quarterly numbers. Further, the company had a debt-to-equity ratio of 0.44.
Valuations
Sainsbury’s current trailing-twelve month (ttm) pe ratio is at 10.54 times. The company’s price-to-book value ratio is just at 0.75 times, while its price-to-cash flow ratio is at 0.19 times.
Conclusion
There are several reasons why not to buy Sainsbury’s shares. These are weakening sales growth, uncertainty in post-Brexit business conditions, and the increasing competition. On the other hand, there are also compelling reasons why it is a good time to buy now. Well-covered dividend payouts, reduced valuations, and an established brand name.
In summary, I may have to increase my long position in Sainsbury’s in order to possibly capture and upside that may come in the medium- or long-term.
Disclosure: I am long Sainsbury’s ADR shares.
Happy investing!
