We might lower our £2.95 fair value estimate for no-moat Sainsbury’s (SBRY) after reviewing the company's full-year results, although we don't expect to make a material change to our long-term forecasts or our view that Sainsbury’s lacks a sustainable cost advantage and pricing power over its direct competitors.
Like-for-like sales declined 1.9% excluding fuel, as a 2.2% decline in supermarket like-for-like sales offset 16% growth in convenience store like-for-like sales and 7% growth in online sales. Most of the decline was expected, as the market as a whole has been in a deflationary period driven by lower input costs, and Sainsbury’s has lowered its prices to improve its value proposition.
We expect these top-line pressures to continue, as Sainsbury’s expects a net price investment sales impact after accounting for both lower prices and expected volume increases of around £150 million.
We also remain cautious that future price cuts may have less impact on volumes going forward, as most major grocers have already cut prices and margins considerably. That said, incomes have improved and prices are more affordable, which should help to drive more balanced growth over time. If Sainsbury's can drive growth and leverage its cost structure, we think that it can maintain a 3-3.5% underlying trading margin.
On the other hand, if traditional grocers continue to lose market share, they may opt to lower prices and sustain short-term losses in an effort to drive traffic and ensure survival. We expect traditional competitors to remain rational relative to one another, but new channels and competitors with different cost structures and value propositions could pull highly leveraged traditional grocers into a prolonged price battle that they would not enter otherwise.
Given the potential for a race to the bottom, we suggest that investors wait to purchase these names with a wide margin of safety.
