Pali Research Downgrades Retail Food Stocks SVU & GAP; Cuts Estimates on SWY
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Pali Research issues ratings changes on Retail Food Group:
Pali analyst says, "The Food Retail group’s value trap designation has been well earned. We are
downgrading SUPERVALU (NYSE: SVU) & Great Atlantic & Pacific Tea Co (NYSE: GAP) from Neutral to SELL and lowering estimates ahead of the upcoming earnings reports. We are also lowering estimates on SELL rated Safeway (NYSE: SWY)."
"Overly optimistic turn around assumptions driving SVU and GAP performance. Recent buyers of SVU and GAP are making optimistic bets on highly leveraged turnaround stories that are both struggling to digest distressed acquisitions against the backdrop of a meaningful consumer recession. An actual turnaround and a cooperating economy are necessary for these bets to work. In our view, for all practical purposes, these business models are broken for the foreseeable future and are operating at trough margin levels that could go lower with no near term reason to expect improvement. The stock performance is indicative of Street expectations for earnings levels that can only be achieved by applying hugely optimistic turn around assumptions, which we view as not only unlikely, but very nearly impossible."
SVU: "We estimate 3Q EPS of $0.31 compared to the Street estimate of $0.34 and assume gross
margins contract 60 bps to 21.8% and operating margins contract 80 bps to 2.6\5%. We estimate comps (5.0%). We continue to believe the SVU guidance for full year comp of (3.0%) and EPS guidance of $1.95 - $2.15 is overly optimistic."
SWY: "We continue to believe that full year comp guidance (1.7%)-(1.0)% remains more at risk than the full year EPS guidance of $1.70 - $1.90. However, further sustained same store sales pressure could lead to a disappointing fourth quarter. More importantly, we believe the 2010 consensus estimate of $1.93 is categorically too high. Recall, excluding the $0.22 of YTD tax benefits puts operating earnings at roughly $1.48 to $1.68."
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