JP Morgan reckons the expected turn in food prices will trigger heightened competition as grocers chase volumes, putting pressure on margins at a time of rising wage bills.
The bank adds that current valuations carry an unattractive risk/reward profile, prompting it to lower Tesco to a “neutral” recommendation with a 20p lower target price at 250p.
B&M, which today continued its expansion with the acquisition of 51 stores from Wilko administrators, bore the brunt of JP Morgan’s caution after being cut from “overweight” to “underweight” in one move. The price target is now 513p rather than 577p.
The discounter has been one of this year’s standout performers as consumers have traded down in the cost-of-living crisis and Wilko’s demise cut a major source of competition.
The shares have risen by around third this year before today’s reverse of 16.2p to 550.8p left B&M at the top of the FTSE 100 fallers board. Tesco shares, which have recovered lately to stand more than 10% higher this year, fell 6.2p to 257.6p.
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Sainsbury (J) (LSE:SBRY)’s is rated at “underweight” by JP Morgan, but an improved price target from 209p to 238p failed to prevent shares retreating 3.2p to 265.4p.
The bank’s stance on Tesco contrasts with the view of UBS after it recently described the UK’s largest supermarket as “intriguingly cheap” based on a 300p target price.
The Swiss bank believes sentiment has been helped by recognition among regulators and in the press that the market is functioning competitively and not profiteering. Its analysis of consumer survey metrics have shown Tesco holding on to the improvements it has made on price perception in recent years.
Half-year results are due on 4 October, when UBS expects Tesco management to get the focus back on the company’s record of strong trading and the potential for upgrades.
Before then investors will get results from a broad spread of the retail sector, including B&Q owner Kingfisher (LSE:KGF) on 19 September, Dunelm Group (LSE:DNLM) on 20 September and Next (LSE:NXT) on 21 September.
Primark business Associated British Foods (LSE:ABF) delivers its year-end update on Tuesday, with Deutsche Bank looking for a 7% rise in like-for-like sales in the fourth quarter for overall retail sales growth of 17% to £9 billion.
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The bank said this week: “We have been bullish on the retail sector generally this year as consumer demand has remained robust despite the inflationary and interest rate headwinds, with our main areas of caution relating to home improvement and online retail.
“In luxury retail we have taken a more cautious stance than most given the strong performance since mid-2022, reliance on a Chinese recovery and fading earnings momentum.”
AB Foods shares have risen by around a fifth this year but that progress has been more than overshadowed by the 80% jump that has propelled Marks & Spencer Group (LSE:MKS) into the FTSE 100 index. At the other end of spectrum, underperforming shares have included ASOS (LSE:ASC) and the DIY-focused Wickes Group (LSE:WIX) and Kingfisher.
More signs of consumer spending resilience emerged today when the British Retail Consortium reported a 4.1% rise in total sales in August. That was above the three-month average growth of 3.6% but representing a fall in volumes based on inflation at 6.8%.
Sales of non-food products had their best month since February, particularly for health and beauty products, although clothing and footwear saw weaker growth.
Attention now turns to Christmas and retail’s “golden quarter”, with bargain hunting set to start much earlier this year as consumers seek out good deals to stretch their budgets.
Paul Martin, KPMG’s UK head of retail, said: “With shoppers becoming more calculated and aware of what they are getting for their money than we have seen for a long time, retailers will have to fight harder for every sale.”
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