Tesco PLC (LSE:TSCO), J Sainsbury PLC (LSE:SBRY) and B&M European Value Retail SA fell on Tuesday after JP Morgan took a more cautious stance on the European food retail sector.
The US investment bank double downgraded B&M to 'underweight' from 'overweight' and moved Tesco to 'neutral' from 'overweight', sending shares down 3.5% and 2.3% respectively.
The broker lowered its price target for Tesco to 250p from 270p and for B&M to 513p from 577p.
Shares in Sainsbury also fell 1.6% as JP Morgan reiterated an underweight rating despite lifting its price target to 238p from 209p.
"We take a cautious stance on the sector, reflecting our analysis of grocery pricing deflation prospects as we approach 2024," the bank said in a note to clients.
"We think current sentiment and valuations make for an unattractive risk reward as investors start to reassess portfolios into 2024, when we expect grocers' P&L and cash flow dynamics to worsen vs 22-23, triggering downside risk to consensus," the bank added.
Deflation is a real possibility and its implications are not factored into either expectations or share prices, JPM thinks.
"Steep disinflation/deflation will likely trigger heightened competition, with price investments denting gross margins."
"This, combined with sticky minimum wage increases, shall cloud operating margin outlook," the bank reckons.
The bank has cut EPS forecasts for B&M for the current financial year by 8.8% and for the following year by 13.4%.
"Our estimates reflect more cautious LFLs from 2024 onwards triggered by price investments and lower food inflation prospects, on the assumption that volume response is an insufficient offset as trading down continues," it said.
Across Europe, the bank has downgraded Ahold-Delhaize to 'underweight' from 'overweight', Jeronimo to 'underweight' from 'neutral' but upgraded Colruyt to 'overweight' from 'underweight'.