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3 Supermarket Stocks Worth Watching on Solid Industry Trends

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The Zacks Retail – Supermarkets industry players have been benefiting from consistent efforts to improve store and online operations. Their initiatives to boost delivery and payment options and strengthen assortments have been tailwinds. However, high growth-oriented investments and supply-chain costs remain a threat to margins.

Nonetheless, increase in store traffic and online demand and efforts to boost omnichannel operations bode well for the industry. Walmart Inc. (WMT - Free Report) , The Kroger Co. (KR - Free Report) and Companhia Brasileira de Distribuicao are a few industry participants that look well placed on the prevalent opportunities.

About the Industry

The Zacks Retail – Supermarkets industry includes supermarket retailers that offer 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. Food retail accounts for a chunk of their business. The industry has undergone a significant 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 and offering easy payment options.

What's Shaping the Future of the Supermarkets Industry

Robust Omnichannel Efforts: Supermarket retailers have been focused on strengthening store and online operations to boost customers’ experience. The companies’ efforts on store improvisation, merchandise enhancement and replenishment of assortments along with prudent pricing strategy have been proving beneficial. Also, industry players are striving to bolster online operations. The increase in popularity of online shopping, particularly after the pandemic, propelled companies to constantly ram up efforts in this arena through acquisitions, partnerships and improved delivery and payment systems. Companies have resorted to several options including same-day delivery, buy online and pick-up in-store, curbside pickup as well as contactless payment to boost customer experience and sales. Companies’ concerted efforts to unite store and online operations to offer customers a solid omnichannel experience certainly keep them well-placed for growth. Also, digitization has been enabling several supermarket players to gain detailed insight into their operational performance, demand cycles, supply-chain issues, and delivery status. This enables them to improve their competitiveness in the market with enhanced operational productivity, product quality and lower costs.

Strong Demand to Benefit: The participants have been gaining from solid demand for essentials, driven by the pandemic-led elevated at-home consumption. Per the report published by Commerce Department on Jun 15, U.S. retail sales grew 0.3% in May after increasing 0.4% in April. Impressively, May retail sales increased 1.6% from the year-ago period’s levels. The rise of retail sales for the second successive month in May, indicates a favorable demand in the industry, despite the presence of inflationary pressures. Solid demand for staple products, especially groceries, cleaning supplies and medicines, supported by higher dine-at-home and work-from-home practices have been driving the industry. These demand trends are likely to stay in the near term, as many Americans prefer to work and cook at home. This has led the industry players to continue making investments toward innovative offerings and merchandising to make the most of such trends.

Pressure on Margins: The industry is dealing with margin pressure owing to inflation in raw materials and other expenses, which have been denting profitability. Also, elevated freight charges and wage expenses pose a threat to margins. Continued price investments and other promotion activities also come at the cost of margins. This apart, the need for frequent investments to innovate products and bolster online operations often hurt the bottom line.

Zacks Industry Rank Indicates Strong Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #26, which places it in the top 10% 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 bright 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 March 2023, the industry’s consensus earnings estimate for the current fiscal has increased 1.7%.

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

Industry Versus Broader Market

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

The industry has gained 22.8% over this period compared with the S&P 500’s growth of 13.9%. Meanwhile, the broader sector has risen 7.3% 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 22.12X compared with the S&P 500’s 19.55X and the sector’s 23.05X.

Over the last five years, the industry has traded as high as 24.48X and as low as 17.24X, with the median being at 20.72X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years) Versus S&P 500

Price-to-Earnings Ratio (Past 5 Years) Versus Sector

3 Supermarket Stocks to Keep a Close Eye on

Walmart: This supermarket giant has been benefiting from its strong omnichannel efforts and last-mile delivery capabilities. Walmart’s e-commerce business and omni-channel penetration have been increasing for a while now. The Zacks Rank #2 (Buy) company has been gaining from its sturdy comp sales record, which in turn is driven by its constant expansion efforts and splendid e-commerce performance.  The company’s focus on store remodeling to upgrade them with advanced in-store and digital innovations is noteworthy. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Walmart focuses on several e-commerce initiatives, including buyouts, alliances and improved delivery and payment systems. Additionally, it is making efforts to expand in the booming online grocery space, which has long been a major contributor to e-commerce sales. The consensus mark for current fiscal-year earnings has gone up by 2.1% to $6.21 per share in the past 60 days. It has an estimated long-term earnings growth rate of 5.5% and a trailing four-quarter earnings surprise of 12%, on average. Shares of WMT have increased 26.2% in the past year.

Price and Consensus: WMT

The Kroger Co.: The company has been benefiting from its strong digital business and investments to enhance product quality and expand digital capabilities. This Zacks Rank #3 (Hold) company is focused on no-contact delivery option, low-contact pickup service and ship-to-home orders. Also, the company’s “Restock Kroger” program, involving investments in the omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization and lowering of expenses has been gaining traction.

The company’s Customer 1st strategy allows it to enhance consumers’ shopping experience, thus helping it to retain and boost customer base. KR has seen upward estimate revisions for its current fiscal year’s bottom line in the past 60 days by 0.2%. This Cincinnati-based retailer has an estimated long-term earnings growth rate of 5.8% and a trailing four-quarter earnings surprise of 7.8%, on average. Shares of KR have fallen 3.5% in the past year.

Price and Consensus: KR

Companhia Brasileira:  The Zacks Rank #3 company has been gaining from its digital development, with delivery models, like James Delivery and Click & Collect, yielding results. The company’s concentration on its core priorities like structural top-line growth and a focus on assortment have also been working well. Store-expansion efforts have been another driving factor. CBD’s loyalty program and app development efforts have been yielding results.

Shares of this Brazilian retailer of food, clothing, home appliances, electronics and other products have rallied 23.1% in the past year.

Price and Consensus: CBD

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