It doesn’t surprise me that J Sainsbury (LSE: SBRY) has seen its share price slump again during the second half of 2017 following a pretty impressive start to the year.
In fact, I was quite taken aback at the FTSE 100 retailer’s ascending market value up until May as the fragmentation of the UK grocery space continued to pick up momentum. This is forcing the likes of Sainsbury’s to put its already thin margins under pressure via heavy and relentless price slashing, a phenomenon that is adding to the profits pressure created by rising costs.
Latest Kantar Worldpanel data in mid-September showed that £1 out of every £8 in the country’s supermarkets is now being spent at either of the German discounters Aldi and Lidl, and that two-thirds of Britons have visited either store in the past three months.
And the increasing strain on household budgets created by stampeding inflation and stagnating wage packets is likely to attract more and more of J Sainsbury’s customers through their doors, with both firms engaged in massive expansion strategies to exploit this phenomenon.
Flash in the pan?
Look, Sainsbury’s has performed pretty impressively in light of these tough trading conditions more recently, and like-for-like sales grew 2.3% (excluding fuel) during the 16 weeks to July 1. And the company’s acquisition strategy that saw it buying Argos last year has also been pretty impressive. However, I remain cautious over the long-term picture at the London business as competition both online and in-store accelerates.
The City expects earnings at Sainsbury’s to fall 9% in the 12 months to March 2018, the fourth successive reverse if realised, and I would not be surprised to see a predicted 13% bottom-line recovery in fiscal 2019 fall flat.
I reckon bargain hunters should ignore a low forward P/E ratio of 12.8 times given that J Sainsbury’s share price could keep on plummeting.
Turning the screw
Kingfisher (LSE: KGF) is another Footsie-quoted share I expect to endure expected profits trouble, its operations struggling for traction in mainland Europe as well as in the UK.
The DIY giant also surprised with its latest set of trading details earlier this month, Kingfisher advising that it had generated underlying pre-tax profits of £440m in the six months to July, up 0.9% year-on-year.
But the release underlined the problems it continues to face in its key markets. Group sales at constant currencies fell 1.3% in the first half, with turnover in France plummeting 4.1% on the same basis and revenues in the UK and Ireland dropping 0.4%
The B&Q and Screwfix owner is feeling the strain from tough trading conditions in its core markets, while the disruption created by its transformation strategy is adding further stress to the top line. So City brokers are expecting earnings to fall 2% in the 12 months ending January 2018, resulting in a forward earnings multiple of 12.5 times.
This is also low on paper, but again does not reflect the fact that this figure, as well as predictions of an 11% profits recovery next year, could disappoint. I reckon share pickers should continue to steer well clear of Kingfisher right now.
