The performance of J Sainsbury (LSE: SBRY) over the key Christmas trading period was relatively disappointing. The company released a trading statement on Wednesday which showed falling like-for-like (LFL) sales in what was a challenging and highly competitive marketplace.
As there is not expected to be a major change in the company’s operating environment over the short run, and the stock appears to lack a margin of safety, there may be better opportunities available elsewhere in the retail sector in my opinion.
Challenging outlook
The third quarter proved to be a somewhat mixed period for Sainsbury’s. Its grocery sales grew by 0.4%, with Groceries Online and Convenience recording sales growth of 6% and 3% respectively. However, its General Merchandise sales declined by 2.3%, while Clothing sales dropped by 0.2%. Overall, this led to a fall in total retail sales of 0.4%, with LFL sales down by 1.1% when compared to the same period of the previous financial year.
Clearly, this is a disappointing performance. However, it is not totally unexpected, since the wider retail sector has been reporting difficult operating conditions for a number of months. Consumers are cautious about their financial future, and this seems to be causing a reduced appetite for a variety of retail products.
This situation is expected to continue over the medium term. Sainsbury’s is forecast to post earnings growth of just 2% in the current year, followed by growth of 4% next year. Since it trades on a price-to-earnings (P/E) ratio of 13.4, it appears to lack a margin of safety. While the acquisition of Asda may provide some relief in terms of cost reductions, the stock appears to be overpriced relative to some of its industry peers during what could prove to be a difficult period for the retail sector.
Growth potential
Of course, the prospects for budget retailers could be brighter than the wider retail segment. Consumers seem to be growing ever more price conscious, and this may lead to them trading down to no-frills options such as B&M (LSE: BME). It is seeking to expand its presence, and appears to have encouraging growth prospects.
For example, in the current year it is forecast to post a rise in earnings of 13%, followed by further growth of 14% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.4, which suggests that it may offer good value for money.
Clearly, it is difficult to predict how consumer confidence will change during the course of the year. At the present time, though, Brexit seems likely to remains a dominant news story during the course of 2019, which could impact on consumer behaviour. This could present growth opportunities for retailers such as B&M, with investors not yet appearing to have factored in the company’s growth potential over the next couple of years. As such, it may prove to be an appealing investment in my opinion.
