NEW YORK — Shares of Supervalu were down by more than 6% Tuesday after a pair of stock analysts reduced their earnings estimates for the Minneapolis-based retailer.
Karen Short, an analyst with BMO Capital Markets here, said she was reducing Supervalu’s earnings-per-share estimates for the third and fourth quarters of fiscal 2011 and well as fiscal 2012, reflecting a challenging environment and the company’s struggle to improve sales. Short also downgraded Supervalu’s price target from $13 to $11. Separately, analyst Mark Wiltamuth of Morgan Stanley on Tuesday also reduced earnings estimates for the period and downgraded the stock to an “underweight” designation, citing concerns that its financial performance could suffer while lower prices spark sales in an inflationary environment.
“We believe the company’s shift in strategy to reduce prices and correct overpricing vs. peers will collide with an inflationary food cost backdrop and continued competitive pressures in key Supervalu markets,” he said in a research note. “While we agree that management needed to take action to address comps running at -7%, we are concerned that the margin sacrifice required and the time it will take to turn the ship will be worse than anticipated.”
Supervalu was not alone among food retail stocks getting a new look from analysts Tuesday. Short also reduced earnings estimates for Kroger and Safeway, while lowering its rating on its 13-company food retailing group from “outperform” to “market perform.” Ratings for retailers Safeway, Whole Foods, Vitamin Shoppe and The Pantry were all reduced from “outperform” to “market perform” ratings.
In a conference call discussing the changes, Short said the changes were sparked in part by the valuations of several companies BMO labeled as “outperformers” meeting or exceeding target prices.
“As we hit the tail end of last year, fundamental valuations had started to creep up to or go above our price targets,” she explained. “As a result there were [companies] about which we wanted to remain positive but we would have needed to raise price targets, and in order to raise price targets we would have to raise estimates. And we couldn’t justify much higher [estimates].”
Wiltamuth also downgraded Safeway from “equal weight” to “underweight,” citing concern that inflation would undermine its recent pricing efforts, and competitors would strengthen in key California markets. Safeway stock was down by nearly 4% Tuesday.