J Sainsbury's (SBRY) fourth-quarter trading statement reflected accelerating sales growth despite the challenging consumer-spending environment, but we see headwinds that lead us to be cautious in the near term. We are leaving our fair value estimate unchanged.
Total sales for the fourth quarter grew 6.8%, or 3.5% excluding fuel, bringing like-for-like sales for the full year to 4.7%, in line with our forecast. For the third consecutive quarter, nonfood revenue grew at more than 3 times the rate of grocery sales, and the online and convenience (small-format) stores continued to grow. However, on a sequential basis, sales growth slowed in the fourth quarter. Like-for-like sales excluding fuel grew 1.0%, a material slowdown from the 3.6% growth in the third quarter, and although today's government budget proposals could give some breaks to consumers, we expect there to be further challenges throughout the remainder of 2011. Rising fuel costs, creeping inflation (the consumer price index hit an annualised rate of 4.4% in February, well ahead of the 2.2% nominal wage growth rate in 2010), public sector job cuts, and the recent increase in the national rate of VAT are all likely to lead to heightened pressure on the consumer. Wm Morrison (MRW) and Wal-Mart's Asda (WMT) chain could be the beneficiaries of any trading down by shoppers over the coming months as these pressures continue to bite.
With the stock trading at 13.1 times 2012 earnings and 5.6 times EV/EBITDA, we think the market has slightly overshot Sainsbury's intrinsic value; for value in European grocery stores, we recommend investors look elsewhere for the time being.