A terrifically valued turnaround play
Sainsburys position at the top table of the UK grocery space has allowed it to deliver a proud record of year-on-year earnings expansion, and the firm has seen the bottom line expand at a chunky compound annual growth rate of 8.3% during the past five years alone.
However, the march of the budgeteers and subsequent need to implement significant price slashing is expected to put paid to the firms growth story. Indeed, City analysts expect Sainsburys to report a 9% earnings slide during the year concluding March 2015, to 29.3p per share, and a further 3% dip is predicted for the following 12-month period to 28.4p.
Latest Kantar Worldpanel numbers highlighted the problems which Sainsburys is facing, as the expansion plans of Lidl and its discount-sector peers pushed the shopping heavyweights total market share to 16.4% in the 12 weeks to August 17 and sales lagged 0.3% beneath the industry average.
Still, it could be argued that the difficulties associated with the UK supermarket space are currently factored into the present Sainsburys share price, leaving plenty of upside for solid shareholder returns.
The grocer was recently changing hands on a P/E multiple of 9.6 times forward earnings for this year well below the bargain yardstick of 10 times and which remains low at just 9.9 for fiscal 2016.
Online gives it the edge
In particular, optimists will point to the firms embrace of new technology to reclaim the edge over its rivals, a critical battleground in an increasingly fragmented marketplace.
Sainsburys announced this month plans to trial sales of its TU clothing range online in the Midlands, with a view to a nationwide roll-out next year, while other initiatives include boosting its Click & Collect services by introducing collection points at a number of London Underground stations.
A recent report from industry researcher Verdict illustrated the importance of such services by estimating that collections will account for 6.5bn worth of sales by 2019, up 82% from current levels. Meanwhile, Sainsburys is also entering the space age by allowing customers to scan and pay for their shopping in-store using their smartphones, cottoning onto the growing trend of app-based purchasing.
Combined with the soaring popularity and subsequent heavy investment in the convenience store sub-sector, I believe that Sainsburys investment plan should help it to stem the tide of sales declines and cement long-term earnings growth.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.