Britain’s established grocers like J Sainsbury (LSE: SBRY) have long been under the cosh however, stretching back the days of the 2008/09 recession when economic pressure then forced customers into the arms of the discount chains.

And with customers realising they can now get more for less, the likes of Sainsbury’s have found themselves scrambling to stop their customer bases eroding.

But value isn’t the only retail trend to emerge in the past few years, of course. Indeed, the exploding e-commerce phenomenon has also shaken up the high street, and can offer plenty of opportunity for canny investors. And in this regard I reckon fashion retailer Boohoo.Com (LSE: BOO) has what it takes to generate stunning returns.

Recovery still shelved

The struggles facing Sainsbury’s were underlined by today’s full-year financial release, the country’s second-largest supermarket advising that like-for-like sales (excluding fuel) fell again during the period to March 2017, this time by 0.6%.

As a consequence pre-tax profits at the London firm fell 8.2% year-on-year, to £503m.

And alarmingly Mike Coupe warned that “the market remains competitive and the impact of cost price pressures remains uncertain.”

One bright spot for Sainsbury’s however, was the resolute performance of its recently-acquired Argos catalogue business. Total sales here rose 4.1% year-on-year, while like-for-like sales at outlets in Sainsbury’s supermarkets soared between 20% and 30%.

So it comes as no surprise that Sainsbury’s plans to accelerate the introduction of 250 Argos Digital outlets into its supermarkets to March 2019, up from 59 at present.

But the success of Argos cannot hide the escalating problems Sainsbury’s faces at its core operations (the Argos arm accounts for just 13% of profits, after all). Indeed, rampant expansion by the likes of Aldi and Lidl, combined with the cost pressures created by the falling pound, look set to keep profits on the back foot.

So the City expects Sainsbury’s to print a fourth successive earnings decline in fiscal 2018, a 5% drop currently being expected. And given that this bottom-line stress looks likely to last long into the future, I reckon the grocer’s forward P/E ratio of 14.3 times is far, far too expensive.

In fashion

Those looking to get in on Britain’s retail sector would be better served by investing in Boohoo.Com, in my opinion.

While the company’s elevated valuation may put off some share pickers (Boohoo sports a forward P/E ratio of 69.1 times right now), I reckon this is fair value given the online giant’s exceptional growth outlook. Indeed, it is expected to generate growth of 25% in the year to February 2018 alone.

The company saw pre-tax profit climb 97% during fiscal 2017, it announced last week, to £30.9m, as rampant sales growth abroad drove revenues 51% higher to £294.6m.

Boohoo saw the number of active customers on its books rise 29% last year to a staggering 5.2m, and improvements to its digital platforms across the globe, as well as huge investment in its warehousing facilities, promise to keep sales streaming in across the group. I reckon the business is one of Britain’s hottest retail picks at the moment.

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Sainsbury’s announced that like-for-like sales (excluding fuel) fell 0.5% during the nine weeks to March 11, underlining the company’s battle to stop shoppers flocking to its rivals.

Britain’s second-largest chain saw corresponding underlying revenues rise 0.1% during the prior three months, in what now appears to have been a mere pause in the firm’s downward sales spiral — revenues fell 1% during the first six months of fiscal 2017.

While chief executive Mike Coupe commented that “we are pleased with this performance and are making good progress against our key priorities,” he added that “the market remains very competitive and the impact of cost price pressures remains uncertain.”

Argos cheers

While sales of its traditional items continue to splutter, Sainsbury’s recent acquisition of catalogue colossus Argos has helped take some of the sting out of quarter four’s poor result.

Like-for-like revenues at Argos soared 4.3% during the period, Sainsbury’s observed, a result that drove combined underlying sales across the group 0.3% higher.

Commenting on Argos specifically, Coupe noted that “online participation is growing, driven by mobile and Fast Track delivery and customers are responding well to new ranges,” and added that “we are investing in digital to deliver excellent service and availability, with enhancements to the Argos website and app.”

Competitive concerns

But the plucky performance of Argos is not enough to encourage me to invest in Sainsbury’s, as the struggle at its core operations is only getting worse, with inflationary pressure and signs of stuttering wage growth still pushing customers into the arms of discounters Lidl and Aldi.

Latest Kantar Worldpanel numbers showed sales at these chains shoot 13% and 12.9% higher, respectively, during the 12 weeks to February 26th. This compares starkly with the meagre 0.3% till-roll rise over at Sainsbury’s, and suggests that the chain will have to keep price cutting to stop sales collapsing.

Meanwhile, profit margins at Sainsbury’s are likely to face a double whammy as the ongoing Brexit saga weighs on sterling.

Not cheap enough

Investors have recently shrugged off these fears and the share price of Sainsbury’s recently touched levels not seen since last May. Consequently Sainsbury’s now finds itself dealing on a prospective P/E ratio of 13.2 times.

Whilst below the FTSE 100 forward average of 15 times, I would consider a figure closer to the bargain watermark of 10 times to be a fairer reflection of the chain’s high risk profile.

City analysts certainly don’t expect earnings at Sainsbury’s to snap higher any time soon, and predict that the grocer will follow a 16% slump in the year to March 2017 with a further 4% drop in 2018.

It that happens it would represent the fourth annual fall, and it is not difficult to see these woes extending much further into the future, as the fragmentation of the supermarket sector intensifies. I reckon today’s results should encourage stock pickers to keep giving Sainsbury’s an extremely wide berth.

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Sales in focus

This week there are two interesting companies that should be tying the knot during Q3 both reporting to the market. Sainsbury’s (LSE: SBRY), one of the big four supermarkets, and Argos owner Home Retail (LSE: HOME). While not naturally linked, Sainsbury’s has made an offer for Home Retail that has been accepted by the board and recommended to shareholders so the two should be looking for maximum synergies come Q3.

Since the offer was made earlier this year, Home Retail’s shares have (rather unsurprisingly) outperformed the wider market, so too have Sainsbury’s owing to a better than expected sales performance than was feared by the market. However, as can be seen by the chart, both of the shares have been falling of late, in line with a number of other retailers.

First up will be Sainsbury’s reporting on Wednesday. Investors will be hoping for signs of like-for-like sales improvement, which is unlikely given the downbeat view of Kantar Worldpanel on the major supermarkets published at the beginning of May. That said, under the leadership of CEO Mike Coupe, the group is showing signs of turning itself around with better than expected results revealed at the start of May.

Following Sainsbury’s on Thursday is Home Retail. Given the upcoming transaction with Sainsbury’s in the third quarter, any further deterioration in trading could impact on both share prices as the market may call into question the merits of the deal, especially due to the strength of rivals such as Amazon where growth is showing no signs of stopping.

Just Argos it?

All that said, despite the difficult environment across the retail sector, it doesn’t look to me that Sainsbury’s has overpaid for Argos and its infrastructure given that management believes the acquisition will be earnings enhancing in the first full year following completion. That’s despite the near-14% dilution that will be bought about by the issuance of 261m new shares during the third quarter.

In addition to the earnings enhancements, management believes it can bring about significant synergies (cost savings to you and I) as head office functions and infrastructure are merged, bringing about a leaner machine within the next three years.

Additionally, many Argos stores will be either closed or relocated as leases expire, meaning we should start to see much more in the way of Argos concession stores in our local Sainsbury’s store, which could boost sales.

Fighting on all fronts

However, as I’ve alluded to above, the sector is currently crowded, which in the end will mean survival of the fittest – whether that means disruptive businesses such as Amazon, or eBay, only time will tell.

Combine that with an ultra-competitive, not to mention deflationary, grocery sector and it means Sainsbury’s needs to be up for the challenge and executing the company strategy to the letter in order to stay competitive.

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Supermarket strains

While checkout activity at Sainsbury’s (LSE: SBRY) has improved in recent months, the company still faces a colossal task to overcome the increasing fragmentation of the British grocery market.

Indeed, latest Kantar Worldpanel statistics showed sales at the London firm slip 0.4% during the 12 weeks to April 24th, bucking a steady trend of recent rises. By comparison, revenues at Lidl and Aldi galloped 15.4% and 12.5%, respectively, during the period.

Sainsbury’s is scrambling to reduce its reliance on the ultra-competitive food market, exemplified by its takeover of Home Retail Group, a move that also significantly bolsters its multi-channel presence. But the supermarket still has its work cut out to transform the Argos operator, a business that is also being whacked by massive competition from the likes of Amazon.

Against this backcloth, City analysts expect earnings at Sainsbury’s to duck again in the year to March 2017, this time by a chunky 14%. A subsequent P/E rating of 12.5 is cheap but not cheap enough, in my opinion, given the company’s severe revenues pressures.

Out of juice?

Energy giant Centrica (LSE: CNA) faces a battle across all fronts to return to earnings growth. The steady erosion of its British Gas customer base has been a major headache for Centrica in recent years. Indeed, the relentless rise of promotion-led independent suppliers smashing revenues across the country’s ‘Big Six’ suppliers.

Despite the introduction of fresh, earnings-sapping tariff cuts, this trend continues to gather speed — Centrica’s British retail arm shed an additional 224,000 customers during January-March. And of course Centrica is also being whacked by the impact of subdued crude prices at its upstream division.

The City has subsequently chalked in a 12% earnings dip for 2016, the third successive fall if realised. While a P/E rating of 14 times is decent on paper, I believe this is far too expensive given the array of problems Centrica still has to solve.

Pump perils

The likelihood of prolonged commodity price pain is likely to remain a millstone around the neck of Weir Group (LSE: WEIR), too.

The pumpbuilder — whose products are used across the mining and energy industries — announced in its first quarter update last month that “trading conditions in oil and gas markets reflected further reductions in activity levels in all regions despite the limited improvement in oil prices in 2016.” Weir noted that the US onshore rig count sunk by 40% during the quarter.

Total like-for-like orders slumped 22% between January and March, the company advised, driven down by a 47% decline in oil and gas activity.

While orders in the minerals segment were better — underlying orders fell by ‘just’ 5% in the quarter — these are unlikely to improve substantially as colossal supply/demand imbalances across major commodity markets drag down prices, and with them capex budgets across the industry.

The City expects Weir to nurse a 29% earnings decline in 2016 alone. And I believe a subsequent P/E rating of 18.2 times is too heady given the firm’s patchy revenues outlook.

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The first issue is the price Sainsbury is paying for Argos, since DIY retailer Homebase is being sold off prior to the acquisition going through. Although the deal is being craftily financed through a mix of shares, cash on hand and financing from Sainsbury’s internal bank, the purchase is an expensive one. With the final price of 171.5p per Home Retail Group share, a 75% premium to their pre-takeover announcement price, Sainsbury is buying the struggling retailer at a very pricey 19 times forward earnings. Additionally, Sainsbury plans to close up to 55% of the Argos locations, yet it’s paying a fortune to buy stores it will then shutter.

Second, and most importantly, the acquisition does little to solve the larger issues each retailer is facing. Sainsbury’s management is pursuing the deal in order to place the Argos click-and-collect locations inside increasingly unpopular large out-of-town locations. Yes, Sainsbury has seen incremental increases in sales of non-food goods at these stores, and placing Argos outlets inside them will increase footfall and sales in the short term. But these small increases do little to answer the more fundamental problems facing the Argos and Sainsbury business models.

Market headwinds

Both companies are facing gale-force headwinds in their traditional markets. Sainsbury is losing market share to low-price rivals Aldi and Lidl, and Argos is being battered by e-commerce juggernaut Amazon. Sainsbury, like all the traditional grocers, has seen profits whittled away by the price wars that have sent operating margins falling to 2.71% in H1 2015 from 3.36% five years beforehand. While this decrease has been less than that of competitor Tesco, the Argos deal will do nothing to bring margins on bread and milk back to the level they were at before Aldi and Lidl arrived.

For Argos, operating margins have fallen from 6.7% in 2008 to 3.2% this past year as more and more customers turn to Amazon or other online retailers rather than wander down to an Argos store. The company has done well lately to build an enviable delivery network allowing same-day delivery across much of the UK. However, I find it hard to believe it can compete with Amazon on low prices while maintaining sufficient profitability to make the deal work. And profits 51% lower in 2015 than 2008 back this up.  

Furthermore, while some Argos customers may choose to buy some food at Sainsbury’s when they collect their homeware or electricals purchases, the two chains have very different customer bases. Sainsbury’s bulwark against the low-price sector has thus far been its wealthier customers. But bringing in the lower-end Argos brand risks turning away core customers and diluting that competitive advantage.

At the end of the day, for me the numbers don’t add up: why would combining two struggling retailers somehow create one thriving one? With a huge price tag, little overlap in customer base, and the risk of drawing management’s attention away from fixing the core businesses, I don’t see this deal being one shareholders will look on fondly years from now.

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The retailer emerged as a shock £1bn target for Sainsbury’s (LSE SBRY) in November, but South Africa’s Steinhoff International got in on the action last month by making a £1.4bn bid for the catalogue specialists.

However, Sainsbury’s has been given free run on Home Retail Group after Steinhoff withdrew its offer late last week, leading the British supermarket to make a formal offer at the same price. The board of Home Retail Group said that it looked forward to “working towards a recommendation.”

Food for thought

Sainsbury’s chairman David Tyler has said that the deal “presents an opportunity to accelerate our strategy, delivering compelling revenue and cost synergies.” He added that “we will create a multi-product, multi-channel proposition with fast delivery networks that we believe will be very attractive to the customers of both businesses.”

Sainsbury’s is looking to reduce its reliance on the ultra-competitive food sector, an arena beset by an increasingly-bloody price war prompted by the fast emergence of low-cost rivals Aldi and Lidl.

And at face value this strategy would appear a sage one. Sainsbury’s saw like-for-like sales edge 0.1% higher in the last quarter, the first such rise for two years and one that was underpinned by strong demand for its non-food items.

Sales of entertainment products and clothing galloped 11% and 10% higher in the period, helped by the successful launch of its latest Gok Wan fashion lines.

Is Argos ‘back’?

But many analysts are concerned that the deal may have given Sainsbury’s too much to do. After all, the supermarket now has to battle to turn around two ailing businesses instead of one.

Sales at Argos have been more encouraging of late — a 1.1% sales decline during the 11 weeks to February 27 marks a vast improvement from the 2.6% slip punched in the year to February 2016.

And Sainsbury’s will be particularly pleased with the catalogue specialist’s improving fortunes in cyberspace, a hot growth segment for the retail industry. Online takings at Argos rose 13% year-on-year in the latest quarter, driven by the popularity of the firm’s new FastTrack same-day delivery and collection service.

Sainsbury’s also hopes that Argos’s rising online popularity — not to mention plans to bring Argos outlets into its supermarkets — will significantly bolster the cross-selling opportunities of its existing products.

Don’t expect miracles

Still, the supermarket has plenty of work in front of it to transform Argos into the digital retailer of choice and take the fight to Amazon. Like the grocery segment, Argos operates in a highly-competitive environment, and the firm needs to offer more than better delivery options to return to sales growth.

Besides, Sainsbury’s still relies on its traditional food business to generate earnings growth, prompting suggestions that the grocer would have done better using the funds to invest in developing its existing operations rather than splashing out on Argos.

While the firm’s diversification strategy certainly makes sense, I believe the headaches are likely to persist at Sainsbury’s thanks to the widescale competition across Britain’s retail sector.

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Supermarket struggles

Grocery giant Sainsbury’s (LSE: SBRY) has breathed a huge sigh of relief in recent months as diving sales over the past few years seem to have stabilised. I have long cast doubt on the longevity of any such recovery, however, as middle-tier rival Tesco can attest to — it also enjoyed a brief revenues renaissance around the turn of 2015.

The likes of Sainsbury’s have been reduced to little more than introducing round after round of earnings-crushing price cuts to take on the discounters. So news that Asda is due to slash the cost of hundreds of more products last week comes as a further headache, while news that Aldi plans to open a further 80 stores this year alone poses a more long-term problem.

And Sainsbury’s broader recovery strategy has received a further whack after its £1.3bn bid for Argos operator Home Retail Group was derailed by a £1.42bn bid from South Africa’s Steinhoff International on Friday. Sainsbury’s now has until March 18th to make a new takeover attempt.

Still, I believe Steinhoff International’s move actually does Sainsbury’s a favour — after all, the London firm has enough on its hands to turn around its own struggling supermarkets, let alone taking on the might of Amazon et al  in the general merchandise stakes with Argos.

Regardless of how the takeover pans out, I reckon Sainsbury’s still carries too much risk for savvy investors. A 16% earnings dip is pencilled in for 2016 alone, and although a subsequent P/E ratio of 11.3 times is an attractive ‘paper’ valuation, I believe the chain needs to show much more effectiveness in taking on Lidl and Aldi before I for one would consider investing.

A perilous power pick

Energy giant SSE (LSE: SSE) has been fighting a losing battle over the past couple of years to stop its customer base rotting. The steady rise of independent suppliers has taken a chunk out of the revenues performance across the whole ‘Big Six,’ with householders being egged to switch by consumer groups calling for severe price reductions in line with falling wholesale costs.

And the scale of Britain’s switching culture was laid bare by Ofgem data released this week. The number of consumers changing supplier advanced by 15% year-on-year in 2015, to 6.1 million, the regulator said.

Britain’s major operators have attempted to curry favour over the past year with a string of tariff cuts — SSE itself cut gas prices again in January, by 5.3% — but these moves are having little impact. The London firm saw total accounts fall to 8.28 million in December from 8.58 million just nine months earlier.

Not surprisingly the City expects SSE to suffer a 3% earnings slip in the year to March 2016, putting paid to firm’s long record of annual rises. A low P/E rating of 12.5 times — not to mention a dividend yield of 6.3% — may still attract investors, but I expect both earnings and shareholder payouts to come under increasing pressure in the years ahead.

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