Friday 21 February 2014

Sainsbury's lower profit margins - the negative in the legacy...

Those of you with access to The Interactive Investor will find a useful article analysing and comparing Sainsbury's, Tesco's and Morrisons profit margins:

Supermarket   Gross Margin   Operating Margin
Tesco                       7.4%                 4.9%
Morrisons                  6.8%                 5.4%
Sainsbury's                5.5%                3.86%

Source: The Interactive Investor via Company reports 2012/13 averaging margins for 2012 & 2013

However, whilst the Gross Margins as quoted are fine and fit with the P&L definitions in the accounts, as you know, we have always tried to distinguish between the P&L Gross Margin, and the Bought-in Gross Margin.

In other words, most major supermarkets have approximate bought-in average gross margins of 25%, i.e. they buy for 75  and sell for 100, net of VAT. They then add some internal direct costs - each retailer is different - to arrive at the Gross Margin that they put in the P&L, hence the lower Gross Margins quoted in the article.

This approach makes it difficult to make direct like-with-like comparisons between the companies based on P&L Gross Margins. However, it is valid to compare like-with-like comparisons based on Net Profit Before Tax, and as you know these show Sainsbury's to have been making lower Net Margins over the years.

In our opinion, the real issue for NAMs is the fact that the global financial crisis has severely impacted the Big 4 UK operators, reducing their ROCE performances to between 8% and 11%, far lower than the 10-15% being produced before the crisis...(the only exception being Walmart, who continue to produce ROCE 19%+...!!, proving it can be done...)

This means that their share prices are under pressure, a pressure that will be transferred to suppliers, inevitably...

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