More For More Plan And Store Acquisitions To Strengthen Future Prospects

Key Takeaways

• New store acquisitions and space reallocation towards food are expected to enhance revenue and profitability in key locations.
  
• Cost savings and loyalty programs are aimed at improving efficiencies, customer engagement, and long-term earnings growth.
  
• Weak Argos performance, declining non-grocery sales, and rising costs threaten Sainsbury's margins amid restructuring and consumer spending volatility.

Catalysts

Engages in the food, general merchandise and clothing retailing, and financial services activities in the United Kingdom and the Republic of Ireland.

• The acquisition and planned opening of 11 Homebase stores and 2 Co-op stores are expected to increase supermarket coverage and deliver high return on capital employed (ROCE) in key target locations, potentially driving revenue growth.
  
• The More for More plan aims to rebalance store space towards food, enhancing trading intensity and profitability by adding around 300,000 square feet of food space in supermarkets, targeting higher revenue and improved net margins.
  
• The strategic emphasis on winning big basket customers through improved quality, value perception, and customer satisfaction in groceries is resulting in significant market share gains and could lead to sustained revenue growth.
  
• The rollout of loyalty programs like Nectar, including initiatives like Nectar Prices and extended retail media capabilities, is anticipated to boost customer retention and engagement, potentially enhancing revenue and earnings.
  
• Continued execution of a £1 billion structural cost savings plan over three years aims to improve operating efficiencies and margins, with savings reinvested into technology and infrastructure to support future earnings growth.

J Sainsbury Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming J Sainsbury's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 1.6% in 3 years time.
• Analysts expect earnings to reach £573.7 million (and earnings per share of £0.24) by about December 2027, up from £175.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2027 earnings, down from 36.5x today. This future PE is lower than the current PE for the GB Consumer Retailing industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

J Sainsbury Future Earnings Per Share Growth

Risks

• Weak financial performance at Argos, including a transition from a small profit to a small loss due to lower sales and heavy discounting, may continue to impact overall net margins negatively.
  
• Declines in Sainsbury's General Merchandise and Clothing sales by 1.5% in the first half could indicate challenges in diversifying revenue streams beyond Grocery, affecting revenue growth.
  
• Increased operational costs, notably the £140 million rise in National Insurance contributions, could create inflationary pressures and strain net margins if not fully offset by price increases or cost-saving measures.
  
• Continued restructuring costs, such as the remaining £37 million related to the multiyear restructuring program, can impact earnings and reduce available free cash flow.
  
• Potential volatility in consumer discretionary spending, especially in segments like big-ticket items at Argos, could limit revenue and profit growth, particularly during uncertain economic conditions.

Valuation

• The analysts have a consensus price target of £3.08 for J Sainsbury based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.55, and the most bearish reporting a price target of just £2.45.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £35.2 billion, earnings will come to £573.7 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 7.5%.
• Given the current share price of £2.75, the analyst's price target of £3.08 is 10.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.