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3 Supermarket Stocks to Watch Despite Industry Headwinds

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While players in the Zacks Retail – Supermarkets industry are gaining on burgeoning demand amid the pandemic-led increased at-home consumption and stock hoarding, the trend is likely to moderate with vaccination rollout picking up pace. Apart from this, investments associated with digital fulfillment as well as high COVID-related costs keep margins under pressure.

Nonetheless, constant efforts to enhance omnichannel operations in the face of increased demand for online shopping have been working in favor of The Kroger Co. (KR - Free Report) , Wal-Mart de Mexico, S.A.B. de C.V. (WMMVY - Free Report) and J Sainsbury plc (JSAIY - Free Report) .

About the Industry

The Zacks Retail – Supermarkets industry includes supermarket retailers, which offer products like grocery, health and beauty aids, household chemicals, electronics, stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, entertainment products, home furnishings and much more. Players in this industry operate through various formats such as supermarkets, multi-department stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs. Nevertheless, food retail accounts for a chunk of their business.

3 Trends Shaping the Future of the Supermarkets Industry

Pandemic-Led Demand Likely to Moderate: While a number of supermarket players saw a bump in sales in most parts of 2020, the trend is likely to moderate in the near term. Notably, companies have been benefitting from burgeoning demand (especially online) for essentials due to the pandemic-induced stock hoarding and elevated at-home consumption. Incidentally, higher dine at-home and work from home practices resulted in greater demand for staple products, especially groceries, cleaning supplies, and medicines, to name a few. However, with the vaccination drive gathering pace, consumers are likely to return to the old normal – eating out, going to office and other customary practices. This in turn will result in lower at-home consumption activities and a drop in pantry-loading trends. We believe that these factors may weigh on year-over-year sales comparisons of a number of players in the supermarket space in the forthcoming periods.

Robust Omnichannel Efforts: Supermarket retailers have been going all the way to strengthen operations – both at stores and online. To this end, they have been focused on store improvisation, merchandise enhancement, prudent pricing strategy and efforts to replenish assortments. Additionally, companies have been pushing the edge out of the envelope to bolster their online operations – given consumers’ increased preference for this mode of shopping. In fact, the pandemic-led social distancing has taken online shopping to another level – causing industry players to constantly step up their efforts in this arena through meaningful buyouts, alliances, and improved delivery and payment systems. In this regard, companies have been benefiting from their same-day delivery, buy online and pick-up in store, curbside pickup as well as contactless payment options. Certainly, companies’ concerted efforts to unite store and online operations to offer customers a solid omnichannel experience position them well.

Pressure on Margins: Supermarket players like Walmart (WMT - Free Report) are facing margin pressure owing to elevated COVID-related costs. These include additional employee payments and benefits along with costs associated with upgraded safety and sanitization to protect the health of customers and team members. Apart from this, companies’ constant efforts to bolster online operations and improve supply-chain network entail heavy investments – which again comes at the cost of margins. Additionally, increased competition from other retailers like dollar stores and wholesale clubs, together with heightened promotional activity poses threats to margins.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #198, which places it in the bottom 22% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming less confident about this group’s earnings growth potential. Since the beginning of December 2020, the industry’s consensus earnings estimate for 2021 has dropped 3.7%.

Let’s look at the industry’s performance and current valuation.

Industry Versus Broader Market 

The Zacks Retail – Supermarkets industry has underperformed the S&P 500 composite as well as the broader Zacks Retail – Wholesale sector over the past year.

The industry has gained 18.2% over this period compared with the S&P 500’s growth of 26.2%. Meanwhile, the broader sector has gained 37.9% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 22.46X compared with the S&P 500’s 22.49X and the sector’s 30.64X.

Over the last five years, the industry has traded as high as 24.32X and as low as 15.4X, with the median being at 19.19X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

3 Supermarket Stocks to Keep a Close Eye on

Wal-Mart de Mexico: This subsidiary of Walmart operates discount stores, hypermarkets, supermarkets and clubs in Mexico as well as Central America. The company has been focused on fueling broad-based growth across its different formats, categories and regions on the back of solid e-commerce momentum and strategic investments. Incidentally, the company has focused investments toward omnichannel, automation and technology projects. Impressively, e-commerce sales more than doubled in 2020. Apart from this, Wal-Mart de Mexico’s productivity initiatives and cost-saving efforts bode well. Notably, this Zacks Rank #2 (Buy) company’s consensus mark for 2021 earnings has climbed by a cent in the past 30 days and its shares have risen 3.1% in a year’s time. The company has an estimated long-term earnings growth rate of 8.5%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: WMMVY

The Kroger Co.: The Zacks Rank #3 (Hold) company has seen its shares rally nearly 14% in the past year. A dominant position among the nation’s largest grocery retailers enables Kroger to boost market share with expansion of plant-based products, digital coupons, order online pick up in store and smart shopping lists. The company’s Customer 1st strategy enriches consumers’ shopping experience and convinces them to return to stores. Notably, the company has been expanding contact-free payment solutions like Scan, Bag and Go and Kroger Pay. Undoubtedly, the company is doing everything to meet the rising demand for Pickup orders that help in minimizing person-to-person interaction. Apart from this, the company’s “Restock Kroger” program involving investments in omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization, and lowering of expenses has been gaining traction. Of late, the Cincinnati-based company has been benefiting from the coronavirus-induced increase in demand. Importantly, the company has seen upward estimate revisions for its fiscal 2021 bottom line over the past 30 days by 1.9%. Further, Kroger has an estimated long-term earnings growth rate of 6.3%.

Price and Consensus: KR

J Sainsbury: The company is benefitting from its multi brand and multi channel business. The company, which is engaged in food, general merchandise and clothing retailing, along with offering financial services remains focused on making digital and store-oriented investments to enhance customers' experience. The Zacks Consensus Estimate for its current financial-year bottom line has remained stable over the past 30 days. Encouragingly, this operator of store formats like convenience stores and supermarkets in the United Kingdom has an estimated long-term earnings growth rate of 5.8%. Shares of the Zacks Rank #3 company have rallied 24.8% in the past year.

Price and Consensus: JSAIY


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