Britain’s supermarkets were among the small handful of retail winners in 2020 and early 2021. The Sainsbury’s (LSE: SBRY) share price, along with those of FTSE 100 and FTSE 250 counterparts Tesco and Morrisons, rose strongly as Covid-19 lockdowns forced people to eat more at home. The Sainsbury’s share price has consequently risen 56% since this point last September and over 60% in a year.
Yet despite the gains, these UK retail giants still look hugely inexpensive on paper. For example, at Sainsbury’s, City analysts expect annual earnings to rise 92% in the fiscal period to February 2022. This leaves the FTSE 100 company trading on a forward price-to-earnings growth (PEG) ratio of 0.1.
The Sainsbury’s share price also looks mighty cheap from an income perspective. Analysts expect a full-year dividend of 11.5p per share for the current period. Consequently, Sainsbury’s boasts a meaty 3.9% dividend yield that comfortably that beats the 3.4% FTSE 100 forward average.
Will it keep rising?
There are several good reasons why the Sainsbury’s share price could continue to soar, too. These include:
- Accelerated investment in online. Online sales of Sainsbury’s and other major rivals were (for obvious reasons) very strong during Covid-19 lockdowns. This particular operator grew e-commerce sales 120% in the 12 months to February and it’s now the second-biggest online grocery retailer in Britain. And it seems that online food sales still have plenty more room to grow, Mintel predicting online grocery to be worth £22.4bn by 2024 versus £19.4bn today.
- Takeover talk heats up. Morrisons has been approached by multiple suitors and it announced today its plans to resolve the takeover battle by way of an auction. Could the losing suitor approach Sainsbury’s if it fails, or another contender enter the fray? That commanding position in e-commerce means it could soon attract a bidding war of its own.
- Streamlining pays off. Profit margins for supermarkets are notoriously low so the grocer is making attempts to bump up its own by accelerating cost-cutting. It hopes that this will slash its retail costs-to-sales ratio by around 200 basis points. Positive news on this front would likely provide the Sainsbury’s share price with extra fuel.
I’m ignoring the cheap Sainsbury’s share price
As I say, there are reasons to be optimistic about Sainsbury’s. But to my mind the FTSE 100 business still remains a risk too far. The CBI recently warned that Britain’s labour shortages could last for years, a scenario that could severely hamper the grocer’s cost-cutting plans and mean that many of its shelves remain empty.
I’m also concerned by the threat of intense competition to the Sainsbury’s share price over the long term. Aldi and Lidl continue aggressively expanding their bricks-and-mortar estates. The German discounters have also dipped their toe into the online grocery marketplace, an area in which Amazon looks set to continue investing heavily too. So while Sainsbury’s is cheap, I’d much rather buy other low-cost UK shares right now.