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"Earnings shock" for UK supermarkets

The UK’s leading supermarkets could be in for an earnings shock due to falling food prices, a leading City firm has warned.

Issuing sell recommendations on Tesco, Morrisons and Sainsbury’s, Citigroup analyst Alastair Johnston said investments in the big UK supermarkets were “too risky” in the next six months as he forecast food price deflation will hurt sales and margins by more than currently forecast.

His report was based on the experience of grocers in the United States: “Companies, analysts and investors have all been surprised by the severity of the food price falls seen in the US and the impact this has had on earnings.

“US grocers foresaw little earnings impact from the prospect of lower inflation, and some even said they welcomed it. We see a similar picture developing in the UK.”

Mr Johnston said while it may seem that periods of lower food prices should be a boon for grocers, they are not necessarily a good time for investors to buy into the sector.

“Low inflation or deflationary periods tend to be associated with periods not just of low top-line growth but also heightened price competition and lower gross margins,” he said.

Food price inflation has come down substantially since last year after a drop in oil prices and bumper European wheat harvest.

Inflation hit 13% last August, peaked this year at 11.5% in February, but had fallen to 2.2% two months ago.

Morrisons was identified as the “least unattractive” investment and the most likely of the three supermarkets to meet consensus earning expectations next year.

The Bradford-based chain, which has been pushing its fresh food and “value for money” offering, posted a 22% rise in underlying first-half profits last month.

This was posted in Bdaily's Members' News section by Ruth Mitchell .