The European food retail sector has been upgraded to ‘positive’ from ‘neutral’ by a leading industry analyst, based on a forecast of more positive share trends in 2010.
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In a research note by Barclays Capital, analysts said food retail stocks had under-performed in the rallying of equity markets since the spring but would benefit from growing market interest.
Analysts James Anstead and Amy Crofton argued that the “upside” for the wider equity market looks “more limited” than earlier in the year – making European food retail “more investible” in the year ahead.
They claimed that food retailers would next year benefit from rising food prices as commodity costs slowly increase.
“We expect an inflexion point in food inflation in the first half of 2010,” Anstead and Crofton wrote. “Looking at soft commodity prices and energy prices, there seems good reason to expect upward pressure on food prices to start feeding through to consumer prices before much longer.”
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By GlobalDataHowever, they added: “Note that we are in no way predicting a return to the high levels of food inflation that were prevalent in 2008, simply a return to the historically ‘normal’ low levels of food inflation.”
Nevertheless, the Barclays Capital analysts issued a note of warning on Carrefour, the world’s second-largest retailer.
The analysts said Carrefour’s “continuing weak performance”, as shown by its third-quarter sales, led them to be less positive about the French retailer, relative to the rest of the sector, in the short-to-medium term.
For the six months to the end of June, the retailer’s operating profit tumbled 28% to EUR1.01bn (US$1.45bn).
“The French market does not seem to be showing any easing in competitive pressure – and the recent departure of two senior executives does not give us any confidence about Carrefour’s own performance within the market,” James Anstead and Amy Crofton noted.
“At some point Carrefour may well begin to deliver on its plan to cut costs – and this may provide the market with some excitement. However, it is hard to see how this will happen before the first-half figures at the end of August 2010, and there remains a small risk that 2009’s full-year guidance could be missed.”
The analysts, however, were more confident about the long-term margin potential of German retailer Metro Group.
“We think that Metro’s Shape 2012 turnaround story is very credible – and its credibility has been enhanced by the first signs of cost savings beginning to flow through in the third-quarter results,” the analysts insisted.
“Metro is clearly the most pro-cyclical stock in the European food retail sector given its non-food bias, its high leverage, its exposure to emerging markets and its potential for corporate reorganisation.”
However, they added: “Metro is perhaps the stock with the highest numbers of potential triggers on the horizon – we are optimistic that Media Markt will have a strong fourth quarter of 2009, that there may be news on store acquisitions from Karstadt in early 2010.”
Third-quarter earnings for the German retailer remained “almost stable” in November and EBIT totalled EUR748m for the first nine months of the year despite a “challenging market environment” and a currency related decrease in sales.
Sales totalled EUR46.1bn in the January to September period. The group has emphasised its commitment to investing in expansion despite the economic downturn.
