The shares of Supervalu Inc , Safeway Inc and Whole Foods Market Inc were among the stock market's biggest losers on Tuesday after investment firms cut ratings on tSafeway.comhem.
"It's obvious we're still not in a robust economic environment," BMO Capital Markets analyst Karen Short said in a conference call with clients to discuss estimates and ratings revisions for the industry.
Tempered expectations for year-over-year profit growth are "reasonable in an environment that is still quite choppy," she added.
Investors had hoped 2011 would usher in a big improvement in supermarket earnings, but such optimism is being dashed by costs, the jobless economic recovery and other factors, including a long-running price war and stiff competition from general merchandise retailers ranging from dollar stores to Wal-Mart Stores Inc .
While the U.S. economy is strong enough to help drive up the price of oil, coffee and wheat, it is still too weak to spur the kind of hiring that would meaningfully buoy consumer spending.
If traditional U.S. supermarkets are not able to raise prices to offset higher costs for food, their profits will take a hit, analysts said.
"There has probably never been a tougher time for supermarkets," said Bill Bishop, chairman of retail consultancy Willard Bishop.
RATINGS REVISIONS
On Tuesday, Morgan Stanley advised investors to cut holdings in Supervalu and Safeway as rising food costs threaten to dent results, sending their shares down 6.3 percent and 3.8 percent, respectively.
The brokerage downgraded Supervalu and Safeway to "underweight" from "equal weight."
Supervalu shares closed down 61 cents at $9 and Safeway fell 85 cents to $21.64, both on the New York Stock Exchange.
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