US stock analysts at Sanford C. Bernstein initiated coverage on shares of many of Europe's major supermarket chains, in a report issued yesterday.
In Great Britain, Bernstein initiated food retailers Morrison's, Sainsbury's and Tesco. Morrison's and Sainsbury's have been initiated with a Market-Perform recommendation, while Tesco is started as Underperform.
Across the continent, Ahold and Metro seem to be looked upon favorably, while hopes of turnaround for Carrefour are dashed.
According to the report, written by Bruno Monteyne and Richard Clarke of Bernstein, Tesco PLC has a 1-year low of $15.10 and a 1-year high of $18.51. The stock has a 50 day moving average of $17.57 and a 200 day moving average of $17.07. The company’s market cap is $45.034 billion.
The reason given by the Bernstein analysts for Tesco's Underperform rating was that "the company started to struggle to maintain its earnings growth", since achieving its all-time market share peak of 32% in 2007.
"Tesco lost its value credentials: from being within 1% of Asda prices, the gap is now 5% to 9%. Tesco is now in an impossible position: it is neither value nor quality, it is simply everywhere. Its weak and undifferentiated retail offer holds back sales and profitability."
The Bernstein research also very critical of the company's approach to international expansion, labeling it as a "failure".
"Tesco's standardised systems and processes combined with country CEOs rotating on average every 24 months, makes for a weak set-up when the economy turns or competition stiffens.
We expect that Tesco's current strategy will fail to turn around their fortunes in the UK," the report said.
A "distinct retail offer that resonates with customers," is just one of the reasons given for Sainsbury's five year period of market share increases. Excellent store location and the early move in to the fast growing market segments of online and convenience are also part o their successful recipe.
However, Bernstein did warn that "a price war by Tesco would be damaging to Sainsbury's in the short term".
Carrefour's stock has performed well of late (up 53% in 12 months, +26% versus MSCI Europe) as hopes for recovery build on the back of two good quarters in France. Bernstein however, don't share the enthusiasm around this stock, mainly because of what it describes as the "structurally challenged" nature of its sales. 74% of its sales are in France and Europe where it is more dependent than its peers on hypermarkets and supermarkets, the slowest growing of retail formats.
"We don't believe the French turn-around plan is working," say Bernstein. "In our experience successful turn-arounds are sales led…we don't see the improved retail offer in stores".
Holland's Ahold is described in the report as the most undervalued retailer in the sector.
"Ahold is the only retailer in our coverage who has been able to grow sales densities and volumes on a like for like basis in its mature estate".
In the US and the Netherlands, they have dominant market shares: typically 25% in respective US cities and 31% in the Netherlands (Albert Heijn).
Germany's Metro Group is "in a difficulty spot…but attractively valued," according to the report.
"An IPO of its Russian operations would provide transparency and extra growth to this inherently strong business model. In Europe we expect stabilising economies to support sales and 15bpt recovery in EBIT margins(from 3% in 2012FY to 3.15% in 2014FY).
Sanford C. Bernstein is widely recognised as Wall Street’s premier sell-side research firm.
For more information on Bernstein's 85 page report on the European retail sector, visit www.bernsteinresearch.com
© 2013 - European Supermarket Magazine by Enda Dowling and Kevin Kelly
