Shares of prominent British retailers, including Tesco (OTC:TSCDY) and B&M European Value Retail, experienced a decline on Tuesday following downgrades by US investment bank JP Morgan (NYSE:JPM). The bank expressed a cautious view of the European food retail sector, triggering a 2.4% drop in Tesco shares to 257.6p and a 3.1% fall for B&M shares to 549.6p.
JP Morgan downgraded Tesco from 'overweight' to 'neutral' and reduced its price target to 250p from 270p. For B&M, the bank shifted its rating from 'overweight' to 'underweight,' slashing the price target by 64p to £5.13, and contracted its earnings per share forecast for this year and next.
Sainsbury's shares also slid by 1.2% to 265.5p as JP Morgan maintained an underweight rating despite increasing its price target from £2.09 to £2.38.
The bank warned that Europe's food retail industry is not adequately preparing for a possible downturn in 2024, which could lead to a decline in grocery prices. "Steep disinflation/deflation will likely trigger heightened competition, with price investments denting gross margins," JP Morgan noted in its report.
This prediction came as Barclays (LON:BARC) data showed weaker growth in supermarket sales last month. Grocery spending expanded by 4.5% in August, compared to a 5.2% increase in July, attributed to easing food price inflation and consumers seeking better value for their weekly shopping.
On the same day, the British Retail Consortium (BRC) and KPMG released figures indicating a 4.1% rise in UK retail sales in August, boosted by football fans organizing gatherings to watch the England national women's team.
However, Helen Dickinson, chief executive of the BRC, warned that falling inflation could lead to weaker revenue growth for the UK retail sector in the coming months. "Easing inflation will certainly be welcomed by consumers, but as the rate of price rises falls, so will the extra spending needed by consumers," Dickinson commented.
The UK inflation rate currently stands at 6.8%, having reduced from double-digit levels late last year following successive base rate hikes by the Bank of England since December 2021. Despite this reduction, financial markets are predicting at least one more rate increase given that inflation remains more than triple the central bank's target of 2%.
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