J Sainsburys PLC shares shrugged off news of softer sales in the first quarter, with much of the bad news priced in, though in its analysis the City has perhaps more searching questions for the supermarket retailer.
The first would be about how Sainsbury intends to compete for customers amidst inflating prices and the cost-of-living crisis, albeit, today’s statement did more than hint at management’s thinking.
Sainsbury’s told investors it would invest £500mln to help keep prices low, indicating price reductions may be on the way, as part of a strategy to keep customers coming through the doors.
Evidently, it is doing plenty of effort to not pass on all the rising prices to customers, with its pricing below most of its peers and on a comparative footing to Aldi.
It’s a risky strategy, that could help Sainsbury retain market share, or alternatively, erode margins and fail.
There’s only so much that can be cut before margins start to come under pressure, highlighted Hargreaves Lansdown equity analyst Matt Britzman.
“Cost cuts are on the cards to help pay for that, but there’s a limit as to how much fat can be trimmed.”
“If costs keep rising, margins will feel the effect and it wouldn’t be a surprise to see profit guidance come under pressure again at some point this year.”
Of course, companies such as Sainsbury’s have been around for a long time and have seen inflation and recession before.
In the shorter term, however, circumstances can leave a prized brand like this vulnerable to a takeover – especially, from potential private equity suitors.
There’s been takeover activity in the sector already in the recent past, for example, the £1.7bn buyout of Morrisons earlier this year, so it's unsurprising that City chin-waggers have been quick to talk up the possibilities of a move on Sainsbury.
“Sainsbury remains an attractive takeover,” so says Alex Smith, an analyst at research house Third Bridge.
“Our experts say that UK supermarkets have a high entry barrier and have been undervalued for some time.”
Smith reckons Sainsbury’s “focus on everyday low prices for key shopping basket items” is a better approach than “hell for leather on pricing promotion.”
It is an approach that may allow it to keep a hold of customers that would otherwise have been poached by lower-pricing retailers like Aldi and Lidl.
Smith adds that it will be able to “offset some of their hypermarket struggles as people gradually return to city centres with its extensive portfolio of convenience stores.”
Currently, Sainsbury has over 800 convenience stores, and only 600 supermarkets, highlighting the importance of people returning to the city to pop into its stores and grab a quick bite.
Richard Hunter, an analyst at Interactive Investor, commenting on private equity money, noted there has “generally been increasing interest in the UK as an investment destination on valuation grounds, and in some individual companies.”
“This part of the UK market could provide a rich seam for potential suitors,” he added, noting the relative robustness of FTSE 100 constituents.
Hunter reckons a number of private equity firms, armed with “an arsenal of cash” are waiting to be move in on potential deal targets, albeit he added there’s nothing, in particular, to suggest that Sainsbury is among them.
“Qatar Holdings holds a 14% stake in Sainsbury and has had a large holding for many years without signalling any intention to go any further,” he added.
Whilst Sainsbury may be touted as a takeover target, with an undervalued price, and there may be a wealth of private equity cash, making an offer would likely not be straightforward nor would it likely go uncontested.
Against an increasing volatile backdrop, it is also less than easy to imagine anyone really diving in, so early in what some are calling an economic crisis.