The UK’s spending habits have changed dramatically over the last month, or so. Food has suddenly become the biggest expense for many of us. This should be great news for supermarkets such as FTSE 100 member J Sainsbury (LSE: SBRY), right?
But today’s full-year results haven’t gone down particularly well with the market. This isn’t to say trading last year was bad.
Group sales were pretty much flat at just under £32.4bn. The company also highlighted it had outperformed competitors on the grocery front. Underlying pre-tax profit fell 2% to £586m. That was mostly due to a tricky first half hit by increased costs and poor weather.
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But let’s not kid ourselves — investment is a forward-looking game. Holders are justifiably more interested in what’s been going on since the coronavirus sent the world into an economic tailspin. On this front, it’s a real mixed bag.
Strong demand but…
As might be expected, Sainsbury said it had seen strong demand for food as the lockdown came into force and many people began stockpiling. Online retailer Argos — owned by the FTSE 100 constituent — also saw higher sales in early March as people were forced to adapt to working from home.
Somewhat predictably, however, the UK’s second-biggest supermarket said demand had normalised over recent weeks. This was partly the result of people adapting to a new normal. It’s also because, as far as Argos is concerned, it couldn’t deliver and install certain items in customer’s homes.
In addition to this, the company also saw “materially reduced” sales in product like clothing and fuel. This makes perfect sense given that the only journeys many of us are making are around our homes… in our pyjamas.
This trade-off in sales was predictable. As such, it looks like it was the company’s outlook on business that has mostly ruffled investors’ feathers today.
…an uncertain outlook
Like most businesses, Sainsbury believes it’s “impossible” to know the full financial impact of Covid-19 right now. Nevertheless, outgoing CEO Mike Coupe said the company was working on the presumption that business will remain “disrupted” until mid-September. This is even if lockdowns have been eased by the end of June.
Should all this come to pass, Sainsbury estimates underlying pre-tax profit for this year would be “broadly unchanged.” While grocery sales might be good, the cost of protecting its staff and customers, employing thousands of temporary workers to meet demand, and weaker sales elsewhere, will bring things down.
Of course, the situation could be worse if the UK lockdown were to be lifted and then reimposed.
Better FTSE 100 opportunities
As things stand, I just can’t get excited about investing in the company. Even once the coronavirus storm passes, I suspect incoming CEO Simon Roberts faces an uphill task. After all, the prospect of a deep recession will likely have a huge effect on consumer demand, even for ‘essentials’.
Combine this with the hyper-competitive nature of its sector, and the fact dividends have been put on hold until later this year, the bull case for Sainsbury begins to look less compelling.
So, while a forecast price-to-earnings ratio of 10 may look initially tempting, I think investors should look elsewhere in the FTSE 100 if they really want to see their money grow. A steal, it’s not.
