Asda setting out "cautious expectations", says Shore Capital

As supermarkets prepare to report on the festive trading season this week, Shore Capital believes Asda’s warning for the year is setting out “cautious expectations” in what could be a better year for the sector.

In an interview with The Sunday Telegraph, Asda boss Andy Clarke warned that there were further challenges to face this year as the retailer prepared to pump another £500m into slashing prices, bringing the total investment in its price cutting target to £1.5bn by 2018.

“There is currently no growth in the food market and the rise of the discounters means that we must take radical action to win back our customers,” he told the newspaper.

Shore Capital’s Clive Black and Darren Shirley noted on Monday that Asda was looking at how it can narrow the price gap from the limited assortment discounters to be more competitive – a task being considered by other supermarkets.

“Mike Coupe, CEO of Sainsbury's spoke of the need to further bare down on the differential with the LADs at the group's interim results in November whilst we also expect Messrs. Lewis & Potts to be working away on this front too.”

However the analysts don’t believe it is all doom and gloom for the sector.

“Where we take some encouragement for the sector as an investment is that this process has commenced, there is a greater understanding and acceptance of the next moves including the fact that there is a realisation of what the LADs are not and cannot do too; particularly if the price differentials are successfully whittled down.

“Additionally, we believe that 2016 will see more robust volumes and easing deflation, factors that should, on materially rationalised capital expenditure programmes, lead to very strong free cash generation from the majors.”

Shore Capital expected Asda's like-for-like sales over the festive period to be between -3% and -3.5%.