Expanding Grocery Range And New Stores Will Fuel Future Reach

Key Takeaways

• Sainsbury's expansion of grocery range and store locations aims to boost revenue with increased market presence and customer reach.
  
• Cost savings through structural changes and technology investments are expected to enhance operational efficiency and improve net margins.
  
• Challenges in the merchandise sector, operational costs, inflation, and competition may hinder revenue growth and pressure J Sainsbury's earnings and profit margins.

Catalysts

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

• Sainsbury's is focusing on expanding its grocery range and more store locations, expecting this to result in increased grocery volume share gains, positively impacting revenue.
  
• The company's investment in personalized loyalty programs and retail media capabilities aims to accelerate customer engagement and drive growth, which could improve net margins through higher customer retention and spend.
  
• Sainsbury's plans to deliver significant cost savings of £1 billion by 2027 through structural changes and investments in technology, enhancing operational efficiencies and potentially boosting net margins.
  
• The company's decision to open 40 new stores, the largest expansion in over a decade, is expected to support revenue growth by increasing market presence and customer reach.
  
• Sainsbury's expects improved profitability from new product innovations, particularly in their premium own-label brand, Taste the Difference, which could enhance earnings due to the higher margin potential of premium products.

J Sainsbury Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming J Sainsbury's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 1.6% in 3 years time.
• Analysts expect earnings to reach £554.2 million (and earnings per share of £0.23) by about April 2028, up from £420.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 14.2x today. This future PE is lower than the current PE for the GB Consumer Retailing industry at 15.1x.
• Analysts expect the number of shares outstanding to decline by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

J Sainsbury Future Earnings Per Share Growth

Risks

• The decline in Argos sales by 2.7% and lower than expected profits in both halves of the financial year could indicate ongoing challenges in the general merchandise sector, which might impact overall revenues and earnings of J Sainsbury.
  
• Increased operational costs due to investments in new store openings and space reallocation, particularly in the first half of the financial year, might lead to disruptions and impact net margins.
  
• Higher inflation rates, especially in the supply chain and fresh food categories, could pressure margins by increasing the costs of goods sold and operational expenses.
  
• The phased withdrawal from core banking services and transition to a third-party model might result in reduced financial services income, affecting the company's overall earnings.
  
• Potential for increased competitive pressures, particularly from rivals like Asda, could lead to a pricing war, potentially affecting revenue growth and profit margins.

Valuation

• The analysts have a consensus price target of £2.899 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 £3.3, and the most bearish reporting a price target of just £2.35.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £35.0 billion, earnings will come to £554.2 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of £2.58, the analyst price target of £2.9 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.