UBS on U.S. Food Retail: Remaining Cautious on Traditional Food Retailers

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UBS on U.S. Food Retail: Remain cautious on traditional food retail

Analyst Jason DeRise, said, "The traditional food retailers have under performed the market by 15% ytd, but the latest round of results do not suggest to us a valuation floor has been reached. We point to three areas of incremental concern in the last couple months: (1) Slower sales and gross profit growth despite fading inflation, (2) signs of price competition heating up and (3) increased clarity on multiemployer pensions."

"Overall slower sales in Q1; signs of an escalating fight for market share: Based on Q1 results so far, traditional food retailers saw a 160bps sequential slow down in comp sales to 0.7% y/y. Though gross margins were flat y/y in Q1, there are signs of increasing price competition: Kroger (NYSE: KR), Supervalu (NYSE: SVU), Safeway (NYSE: SWY), Delhaize, Roundy's (Nasdaq: RNDY), and Wal-Mart (NYSE: WMT) are making price investments/increasing promos. We believe traditional food retail gross margins will fall to protect market share.'

UBS rates SWY and SVY at Sell, KR at Neutral, and Whole Foods (NYSE: WFM), Harris Teeter (Nasdaq: HTSI), and The Fresh Market (NYSE: TFM) at Buy.

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