Players in the Zacks
Retail – Supermarkets industry are gaining on their robust efforts to strengthen store as well as online operations. Companies have been focused on enhancing delivery and payment options alongside bolstering assortments, though these investments and high COVID-related costs pose threat to margins. Nevertheless, continuation of the pandemic-induced pent-up demand as well as concerted efforts to bolster omnichannel operations keeps Walmart Inc. ( WMT Quick Quote WMT - Free Report) , The Kroger Co. ( KR Quick Quote KR - Free Report) and Companhia Brasileira de Distribuicao ( CBD Quick Quote CBD - Free Report) well positioned. 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. The industry has undergone a major transformation over the years, with e-commerce playing a strong role. Given consumers’ rising preference for online shopping, industry participants have been enhancing pickup and delivery services as well as offering easy payment options.
3 Trends Shaping the Future of the Supermarkets Industry
Supermarket retailers have been exploring every nook and cranny to strengthen operations – both 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 online operations. 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. We believe that the pandemic-propelled elevated online shopping trend is likely to stay. Certainly, companies’ concerted efforts to unite store and online operations to offer customers a solid omnichannel experience position them well. Robust Omnichannel Efforts: Supermarket companies have been benefitting from high demand (especially online) for essentials due to the pandemic-induced elevated at-home consumption. Incidentally, higher dine at-home and work from home practices have spiked up demand for staple products, especially groceries, cleaning supplies, and medicines, to name a few. Although demand has moderated from the year-ago period that saw a major surge due to the initial panic-buying, it remains higher than the pre-pandemic levels. In fact, even with things opening up and curbs being lifted, the pent-up demand trend is likely to stay in the near term, as a number of Americans still prefer to work from home and cook at home. Certainly, this calls for supermarket players to continue making investments toward innovative offerings and merchandising, to make the most of such trends. Pent-Up Demand to Stay: Supermarket players 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, continued price investments and other promotion activities weigh on margins. Pressure on Margins: Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail – Supermarkets industry is housed within the broader Zacks
Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #98, which places it in the top 39% 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 solid 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 more confident about this group’s earnings growth potential. Since the beginning of May 2021, the industry’s consensus earnings estimate for 2021 has increased 8.8%. 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 over the past year, while its performance has been almost in line the broader Zacks Retail – Wholesale sector.
The industry has gained 19.4% over this period compared with the S&P 500’s growth of 41.2%. Meanwhile, the broader sector has gained 19.5% 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 21.45X compared with the S&P 500’s 21.86X and the sector’s 28.4X.
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 19.58X, as the chart below shows. Price-to-Earnings Ratio (Past 5 Years)
3 Supermarket Stocks to Keep a Close Eye on
Walmart: The omnichannel retailer has been benefiting from its concerted efforts to keep pace with the evolving consumer shopping patterns. To this end, the Arkansas-based retailer’s efforts to step up its e-commerce game as well as improve store experience have been yielding results. With regard to e-commerce, Walmart has been particularly gaining from strength in online grocery, courtesy of its robust delivery services. Toward this end, the company’s investment in DroneUp; pilot with HomeValet, introduction of Carrier Pickup by FedEx, launch of Walmart+ and unveiling of Express Delivery service among others are noteworthy. Encouragingly, Walmart has been gaining on high demand across categories amid the pandemic-led elevated at-home consumption. With more customers going out to shop in the United States, the company’s store environment is in good shape, while e-commerce continues to be on growth trajectory. Notably, this supermarket biggie’s consensus mark for fiscal 2021 earnings has climbed 1.4% in the past 30 days. Moreover, the consensus mark of $5.95 indicates growth of 8.6% from earnings reported in the same period last year. Walmart has a trailing four-quarter earnings surprise of 17.8%, on average and its shares are up 0.8% in the past three months. The Zacks Rank #2 (Buy) company has an estimated long-term earnings growth rate of 5.5% Price and Consensus: WMT Companhia Brasileira: The company is benefiting from its digital transformation endeavors in the face of consumers’ increased preference for online shopping. Certainly, its delivery models, including same-day delivery — Express and Click & Collect, Traditional or next-day delivery, and Last Mile or next-hour delivery — James Delivery and Open Platform, have been working well. Moreover, the company’s loyalty program and app development efforts have been yielding results. Apart from this, Companhia Brasileira’s focus on store expansion is noteworthy. The Zacks Consensus Estimate for the current fiscal-year bottom line has climbed by a penny over the past 60 days. Encouragingly, this Brazilian retailer of food, clothing, home appliances, electronics, and other products has an estimated long-term earnings growth rate of 21.3%. Shares of the Zacks Rank #2 company have rallied 34.2% in the past three months. Price and Consensus: CBD The Kroger Co.: The Zacks Rank #3 (Hold) stock has risen 4.5% in the past three months. 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. Kroger’s digital business remains one of its key growth drivers. The company has been focusing on no-contact delivery option, low-contact pickup service and ship-to-home orders. 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. Importantly, the company has seen upward estimate revisions for its fiscal 2021 bottom line over the past 30 days by 6.4%. Further, Kroger has an estimated long-term earnings growth rate of 8.5% as well as a trailing four-quarter earnings surprise of 22.1%, on average. Price and Consensus: KR
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