Questor: Back J Sainsbury to prove the doubters wrong

Supermarket has a track record of thriving in tough markets

J Sainsbury

334.60p +4.80

Questor says Buy

Shares in the major supermarkets are about as popular as Sepp Blatter, the beleaguered president of football’s governing body Fifa, at the moment.

Tesco, J Sainsbury and Wm Morrison are under pressure because of concerns about falling sales and the damage that could be done to profit margins from a price war, designed to halt the rise of the discounters Aldi and Lidl.

It does not help, of course, when two knights of the industry describe the performance of their former companies as “bulls**t” and “very disappointing”, as Sir Ken Morrison (formerly of Morrisons) and Sir Terry Leahy (ex-boss of Tesco) have in recent days.

However, the fact that no senior figure from Sainsbury’s past has spoken out perhaps tells its own story. Amid the rout on supermarket shares this year, Sainsbury’s may have been an undeserving victim.

The Sainsbury’s share price is down almost 10pc this year, whereas Tesco is down 12pc and Morrisons 25pc after delivering an enormous profit warning in March.

Tesco and Morrisons are businesses with structural problems: Tesco has a tarnished brand and is struggling to execute its strategy in all UK stores, and Morrisons is desperately trying to catch up in the fast-growing online and convenience-store sectors.

Sainsbury’s does not have these same problems. Thanks to the Paralympics in 2012 its brand is stronger than ever. The business has also just opened its 200th Sainsbury’s Local in London and its convenience store business is growing sales 18pc year-on-year.

Instead, Sainsbury’s share price is the victim of hypothetical questions. What if Tesco launches a full-scale price war and erodes Sainsbury’s 3.5pc margin? What if Sainsbury’s falters when Justin King leaves as chief executive next month after a decade in charge?

Each question is supported by a bit of logic. Sainsbury’s has notoriously lower margins than Tesco and Morrisons, and events at Tesco after Sir Terry left have taught investors to be wary of long-serving chief executives quitting at the top.

However, Sainsbury’s recent track record is all about proving the doubters wrong.

After Lehman Brothers collapsed in 2008, grocery analysts warned that Sainsbury’s could be the loser in the supermarket world as customers deserted it for cheaper rivals.

In fact, Sainsbury’s has been the best performer of the “big four” since then as the company has worked hard to highlight why its own-brand products are different to everyone else’s. At the same time, Brand Match – which offers customers a voucher if the branded goods in their Sainsbury’s trolley would have been cheaper at Tesco – has destroyed perceptions that the company is expensive.

Mr King and his successor Mike Coupe are confident that customers still value “values” and that the strategy Sainsbury’s has followed in recent years remains the right one.

Although sales fell in the first quarter, Sainsbury’s is standing by its guidance that like-for-like sales will grow by a similar amount to last year’s 0.2pc.

The uncertainty in the grocery industry is reflected by the fact that forecasts from analysts for Sainsbury’s annual profits range from £571m to £871m. The average forecast is £756m, which would represent a 5pc dip in underlying annual profits. But with the company offering a dividend yield of more than 5pc, it is worth backing Sainsbury’s to deliver better than that.