Brokers divided as Tesco ups food ante

Pali International said that by the end of last week general retailers had climbed 60% in 2009, while the All-Share index advanced only 9.6%.

However, food groups underperformed. They lost 0.6% of their value in the year to last Friday.

Pali said that despite the tail-off among generalists, soft like-for-like comparisons in the autumn mean that general retailers are likely to remain in favour.

Food remained lacklustre. Tesco’s surprise double Clubcard loyalty points initiative was taken by broker Oriel as a sign that the big grocer is under pressure. Oriel advised investors to switch from Tesco into Sainsbury’s and observed: “Tesco is simply being, for the first time in 15 years, outmanoeuvred by the competition and whilst history tells us that Tesco is a dangerous animal when wounded, we fear for forecasts on the downside when the opposite is true at Sainsbury’s
and Morrison.”

Market monitors TNS and Nielsen both reported slowing grocery performance in August and Tesco’s performance was the worst of the big four. But Bernstein said Tesco remains its top pick
and argued: “With inflation subsiding and consumer budgets under less pressure, we would expect consumers to shop around less and consequently the battle for consumer loyalty to be more important than it has been over the past 12 months – as such we see Tesco’s actions as a sensible tactic to accelerate growth.”

Broker Icap expects soft commodity food prices to rebound next year “and stay higher for longer” and has an overweight position on food retailers. Tesco and Morrisons are Icap’s preferred buys but
Sainsbury’s is rated a sell. The broker said Sainsbury’s “constrained” margin growth prospects and high capital expenditure spend prompted its stance.

Citi raised its Halfords forecast by 5% to £99m. The broker expects like-for-likes to improve and said the retailer’s strong balance sheet “raises the prospect of either a restart of the share buyback programme or an earnings-accretive UK acquisition.” Separately,
Halfords finance director Nick Wharton has become a non-executive director of value homewares group Dunelm.

Altium stuck to its sell advice on Carpetright despite admitting: “This has been consistently the wrong stance throughout 2009.” Altium thinks “any recovery in the UK consumer economy will be muted”. In that case, Altium “would expect the Carpetright share price to suffer”.