2016 proved to be something of a rocky ride for J Sainsbury (LSE: SBRY), the stock shaking wildly as concerns over the long-term health of Britains Big Four supermarkets intensified.
And I reckon the companys forthcoming trading update (slated for Wednesday, January 11) could prompt a fresh downleg.
Industry surveys continue to indicate a steady erosion in the London-based chains customer base. Indeed, Kantar Worldpanel announced last month that sales at Sainsburys dipped again during the 12 weeks to December 4, this time by 0.6%. As a consequence the firms UK market share fell to 16.5% from 16.7% a year earlier.
And revenues at Sainsburys are likely to remain under pressure as a resurgent Tesco eats intosales across the UKs mid-tier operators. It should also continue to be hurt by Aldi and Lidl as they carry on withtheir multi-billion-pound store expansion programme. And the entry of Amazon into grocery adds to an already-congested online marketplace (not to mention the prospect, admittedly quite a way off, of Amazon opening physical stores).
Meanwhile, the prospect of further sterling weakness in the months and years ahead is likely to cause further havoc for margins at Sainsburys, particularly as the company is having to keep on heavily discounting its goods to stop sales imploding.
The City certainly expects earnings to keep sinking for the foreseeable future, and analysts expect dips of 12% and 2% for the periods to March 2017 and 2018 respectively. And I believe a prospective P/E ratio of 12.5 times fails to reflect the colossal task Sainsburys faces to get the bottom line moving in the right direction again.
Like Sainsburys, high street clothing-to-foods giant Marks & Spencer (LSE: MKS) also faces an uncertain future thanks to rising competition.
And I expect this view to be borne out in the retailers latest trading statement (due Thursday, January 12). Indeed, the business has already been subject to heavy share selling over the past month in anticipation of poor results.
M&Sannounced in Novembers half-year update that UK like-for-like sales slipped 3% between April and September, with underlying demand for its clothing and home lines continuing to shock these fell 5.9% during the period. And I believe revenues are likely to keep struggling as inflationary pressures cause shoppers to keep their purses shut.
Unsurprisingly the number crunchers are also prophesying prolonged earnings woes at the firm, and dips of 17% and 1% are expected in the periods to March 2017and 2018.
While P/E ratios of 11.5 times and 11.6 times are decent on paper, these arent low enough to fairly represent the retailerselevated risk profile, in my opinion.
With the companys long-running plan to turn around its ailing fashion lines failing to ignite, and M&S dialling back on international expansion due to flagging overseas sales more recently, I reckon the business is an unattractive investment destination at present.
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