Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at J Sainsbury plc (LSE: SBRY) (NASDAQOTH: JSAIY.US) to ascertain if it can make £1 billion in profit.
Have we been here before?
A great place to start assessing whether or not Sainsbury’s can make £1 billion in profit is to look at the company’s historic performance. Unfortunately, it would appear that Sainsbury’s has never been able to make £1 billion in profit.
Further, Sainsbury’s growth has been slowing during the past few years and at first glance, I feel the company will struggle to make £1 billion in profit. In particular, during the past three years the company’s net profit has actually declined around 7%.
Still, over the same period Sainsbury’s sales have jumped 10%. Sadly, this sales growth has been at the expense of the company’s net profit margin, which has dropped from 3% to 2.6% since 2011.
But what about the future?
After a period of stellar growth, it would now appear that Sainsbury’s is faced with a stark choice: cut prices further at the expenses of profits to drive sales, or increase prices and suffer falling sales.
However, it’s questionable whether or not Sainsbury’s can afford to cut prices further. For example, the company already has the lowest operating margin in the sector of about 3.6%, compared with Tesco‘s 5.2%. This leaves Sainsbury’s with few choices to boost profits. Indeed, driving Sainsbury’s profit margin higher was the only goal renowned CEO Justin King failed to achieve.
What’s more, there are some City analysts who believe that Tesco is about to get aggressive in its turnaround plan by slashing prices in half. Unfortunately, Tesco can afford to do this but Sainsbury’s cannot, as the company’s operating margin would drop to a razor thin 1.3%.
Moreover, a ferocious price war like likely to hit Sainsbury’s hard, as according to research by Kantar Wolrdpanel, only 16% of Sainsbury’s are ‘highly loyal’ meaning that they spend at least half of their shopping budget in Sainsbury’s stores. The figure is closer to 50% for industry behemoth Tesco.
Nevertheless, Sainsbury’s is still expanding rapidly and online grocery sales grew 10% during the key holiday trading period. Convince store sales expanded 18% during the same period. Additionally, the grocer is currently working with Vodafone to develop a new mobile phone network and the company continues to open up new stores within regions where it is underrepresented.
Foolish summary
All in all, Sainsbury’s sales growth has been impressive during the past few years but the company is going to struggle to drive profits higher. So overall, I feel that Sainsbury’s cannot make £1 billion profit.
