Bottom Line: Kwik Save squeezed

KWIK SAVE confirmed yesterday what the stock market has been suspecting since J Sainsbury launched its permanent lower- price campaign at Hallowe'en.

Ironically the company - whose highly successful trading formula is based on discounting - is being squeezed by 'soft' discounting by superstores above it on the average price scale and by 'hard' discounters below it.

Graeme Bowler, managing director and chief executive, conceded that the upsurge in competitive pricing and an increasingly crowded market place will make it harder to maintain the company's impressive growth rate of recent years. Excellent figures for the year to 28 August, showing a 14 per cent increase in pre-tax profits to pounds 126.1m on sales 14.4 per cent higher to pounds 2.9bn, may therefore prove to be something of a watershed.

Some strain is showing already. Gross margins, although higher in the second half than the first, were 0.3 points down at 14.1 per cent. Strong growth in alcohol and cigarette sales explain some of this but there was a drive to boost sales.

It seems to have worked pretty well. Of the 14.4 per cent sales increase, 8.4 per cent represented increased volume on a like-for-like basis and new stores chipped in a further 6 per cent.

Apart from generating good volume Kwik Save also managed to hold the net margin at 4.8 per cent, cutting overhead costs by 0.2 points to 10.1 per cent of sales.

A slowdown may mean pre-tax profits of no more than pounds 140m this year where a prospective p/e of 9.5 and a yield of 4 per cent at 573p, down 9p, is not much different from J Sainsbury. Kwik Save is likely to survive the price war better than most and should be bought when the sector looks like returning to favour.