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Christmas trading at Sainsbury's and Morrisons could disappoint, says Deutsche Bank

Deutsche Bank said it thinks it’s best to sit on the sidelines with Morrisons and Sainsbury's, as it repeated a 'hold' rating and cut its target price on both stocks
Sainsbury's and Morrisons are expected to report a slowdown in sales growth

Christmas trading updates from J Sainsbury plc (LON:SBRY) and WM Morrison Supermarkets PLC (LON:MRW) could disappoint next week with an expected slowdown in sales growth, according to Deutsche Bank.

The bank has forecast Morrison’s will report a 1.0% increase in retail like-for-like (LFL) sales over the 10-week holiday trading period, compared to a 2.1% rise in the third quarter.

Sainsbury’s is expected to post a 0.4% rise in retail LFL sales in the third quarter, down from 0.6% growth in the second quarter.

Deutsche Bank cut its target price on Morrisons to 245p from 260p and on Sainsbury’s to 260p from 300p, but left its rating on both stocks at ‘hold’.

“At Sainsbury’s, the increased share of clothing and general merchandise introduces more volatility to the LFL performance, and Kantar data for the clothing market suggests a slowdown in recent months, partially reflecting unseasonal weather,” the bank said.

“Morrisons have a very tough comp to cycle from last year. However, despite potentially disappointing sales at Morrisons, we expect consensus profit expectations to remain resilient.”

Tesco 'most positive' 

Tesco, on the other hand, was left at ‘buy’ with a target price of 209.25p as Deutsche Bank sees it achieving the “most positive” Christmas trading update.

The supermarket is expected to report 1.7% growth in UK LFL sales in the third quarter and a 3.2% gain in the six-week Christmas trading period following a 2.1% rise in the second quarter.

Last year Tesco, Sainsbury’s and Morrisons delivered total shareholder return of 2%, 0% and 4% respectively, underperforming the FTSE 100 by 9%, 11% and 15%.

“We think the risks to LFL performances are evenly balanced,” Deutsche Bank said.

“At a sector level, we expect profit expectations (and hence cash flow and dividends) to be more robust than LFL sales performances but in any case, we expect managements to be cautious on the outlook.

“We think it’s best to sit on the sidelines (except Tesco which we rate Buy) and revisit the names on any disappointments in 2018.”

Downside risks include more aggressive price competition by Asda or discounters Aldi and Lidl, the bank said.  Upside risks include a more positive than expected margin impact from the return of food inflation or property based mergers and acquisitions, it said.

Inflation set to ease, Deutsche Bank estimates 

Deutsche Bank expects inflation to ease from 3.5% in 2017 to 2.5% in 2018 and sees grocery market growth easing from 3.3% to 2.5% over the same period.

“We expect the Big Four supermarkets to grow sales +2.1% in 18E, a similar rate to 17E, although this represents a narrower rate of underperformance vs. the market, of -0.4% vs. -1.1% in 17 (or -0.9% vs. -1.5% in 17 using Kantar company growth).”

The Big Four, including Tesco, Morrisons, Sainsbury’s and Asda, have been losing market share to Aldi and Lidl while battling rising inflation, which put a squeeze on consumers in 2017.

Morrisons publishes its trading update on Wednesday, 10 January, followed by Sainsbury's on Thursday and Tesco on Friday.

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