How J Sainsbury plc Makes Money

How does J Sainsbury plc (LON:SBRY) make its profits?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We all have a broad idea of what the companies in our portfolios do. But how much do you really know about their products and their markets, or how much each of their activities contributes to the bottom line? Understanding how a company makes its money can help you decide whether it’s a good investment.

Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) formal segmental analysis is near-to-useless. It reports three segments: Retailing, Financial and Property. The latter two segments cover property ventures with the UK’s two biggest REITs and Sainsbury’s Bank, a joint-venture which the supermarket will fully buy out from Lloyds Banking. However, the contribution of both segments is trivial.

So investors are at the mercy of the snippets of more meaningful information the company reveals about the breakdown of its results between food and general merchandise, and between the distribution channels of traditional supermarkets, and faster-growing convenience stores and online.

Core business

Overwhelmingly, selling food in traditional supermarkets is where Sainsbury’s makes money. Out of total revenues of £25bn last year, just £1.5bn came from convenience stores and £1bn online. Non-food sales were just over £1bn. That core business is also what Sainsbury has proved to be good at, with a long track-record of rising quarterly sales and a market share of UK groceries that has risen to around 17%.

Competition is based on price, quality and convenience. Sainsbury’s is particularly strong on own-brand goods, which compete well on value (i.e. price plus quality). It also has a strong emphasis on fresh fruit and vegetable and on UK-sourced foods, though it isn’t involved in food production like smaller rival William Morrison.

Convenience

Sainsbury’s is adding two new convenience stores a week, and plans to have as many of those as its 600 supermarkets by next year, but they still only represent about 5% of selling space. Convenience store sales are growing at over 15% a year compared to under 5% for total revenues. The company also see growth from locating traditional stores to serve the fifth of the population more than 15 minutes drive from away.

Geographically, the chain operates solely in the UK. Apart from Tesco, it’s the only supermarket with a bank, but it’s less adventurous in moving into new fields. It offers mobile telephones (another joint venture, with Vodafone), energy re-selling, digital entertainment downloads and pharmacies.

Sainsbury’s adds about 10% to its profits by realising the value in its real estate through sale and leasebacks. Over the last five years it has made £340m profits by selling £1.3bn of properties. With over £11bn-worth of properties still on its books at £8bn there could be a few more years of that to come.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

 > Tony owns shares in Tesco and Vodafone but no other stocks mentioned in this article. The Motley Fool owns shares in Tesco.

 

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »