Jefferies on Retailing/Food & Drug Chains: Talkin’ Turkey...Prices

Jefferies on Retailing/Food & Drug Chains: Talkin’ Turkey...Prices

Jefferies analyst said, "With inflation ebbing, with a pick-up in employment and with gas prices under $3.50, the food vertical should see a more joyous holiday season. However a closer look suggests this optimism may be misplaced, as volume data remains quite negative, retail price competition seems to be increasing and the absolute employment level is nothing short of abysmal."

"Competition could negate any benefits from a widening retail to wholesale spread. We saw Wal-Mart (NYSE: WMT)(Hold) drop prices by more than 1% for the first time since a May 2011 survey in Boston, as our comparable basket fell -1.9% in Atlanta, following the -1.2% decline in Houston last week. WMT has made a strategic push to invest in price, especially leading into the holidays, which seems to have generated better traffic trends (actually positive in some regions). Kroger (NYSE: KR)(Hold) and Publix, whose baskets were roughly flat sequentially, now hold 10.1% and 19.0% premiums to WMT in Atlanta, up from 7.8% and 16.6%, respectively. Delhaize (DELB BB, €41.73, Hold), moreover, has indicated that it intends to increase its price cutting activities at its Food Lion banner in the Southeast, perhaps suggesting that Wal-Mart’s higher price investment is causing other companies to react. Kroger, we believe, could be pressured by Wal-Mart’s efforts more than most (this includes both the price cutting and the new store openings) given the overlap between the two companies."

"The recent slowdown in commodities has helped curb inflation, but with oil futures near $100, we worry that an increase in gas prices back above the $3.50 level may force consumers to tighten spending, as we have seen in the past and indicated in our survey of consumers regarding driving habits and the price of gasoline."

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