Back to top

Image: Bigstock

2 Supermarket Stocks to Watch on Robust Industry Patterns

Read MoreHide Full Article

Players in the Zacks Retail – Supermarkets industry have been benefiting from their ongoing initiatives to enhance both physical store and online operations. Seamless delivery and payment options, as well as strong omnichannel capabilities, have proven to be effective for these players.

A dynamic operational landscape due to inflation and other economic conditions, along with elevated costs, poses concerns. That said, sustained demand for essentials and strong revenue-driving efforts keep supermarket giants like Walmart Inc. (WMT - Free Report) and The Kroger Co. (KR - Free Report) well-positioned for growth.

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 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 enhanced pickup and delivery services and are offering easy payment options.


Major Trends Shaping the Future of the Supermarket Industry

Strong Omnichannel Efforts: Supermarket retailers have dedicated significant resources to bolstering their operations across both online and offline channels. Their focus on enhancing store layouts, improving product offerings, implementing competitive pricing strategies and replenishing assortments has yielded positive results. Moreover, industry players are pushing the boundaries to enhance their online presence. The surge in online shopping has prompted companies to consistently intensify their endeavors in this arena through acquisitions, partnerships and the enhancement of 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 and contactless payment options. Concerted efforts to unite store and online operations to offer customers a solid omnichannel experience keep supermarket players well-placed for growth.

Sustained Demand Dynamics: Supermarket companies have been experiencing sustained demand for essential items, driven by increased at-home consumption habits. Strong demand for staple products, including groceries, medications and cleaning supplies, is bolstered by prevalent dine-at-home and work-from-home practices. These consumption patterns are expected to persist in the near future, as many Americans prefer to work and cook at home. Consequently, supermarket players have been agile and innovative in their offerings and merchandising strategies to effectively cater to evolving consumer needs.

Dynamic Economic Landscape: Companies are confronting a dynamic operational environment characterized by inflationary pressures and prevailing economic circumstances. These factors predominantly have been affecting budget-conscious consumers, leading them to opt for smaller pack sizes and prioritize lower shelf prices. As a result, consumers are choosing smaller shopping baskets and gravitating toward more cost-effective items to manage their budgets effectively. Despite moderation in inflation, the unpredictable economic landscape and its influence on consumer spending patterns continue to pose challenges to supermarket companies’ revenues.

Escalated Costs Erode Margins: Companies have been facing escalating operational expenses in their efforts to step up performance. Factors such as the costs associated with store renovations and increased wages are putting pressure on the profit margins of companies. The ongoing technological investments made by supermarket entities to strengthen their online operations, along with other promotional activities, further contribute to the strain on profit margins.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #36, which places it in the top 14% 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 outperform the bottom 50% by a factor of more than 2 to 1.

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 and the broader Zacks Retail – Wholesale sector in the past year.

The industry has risen 29.7% over this period compared with the S&P 500’s growth of 33%. Meanwhile, the broader sector has risen 35.9% 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 staple stocks, the industry is currently trading at 23.4X compared with the S&P 500’s 20.95X and the sector’s 22.96X.

Over the last five years, the industry has traded as high as 24.71X and as low as 17.4X, with the median being at 21.57X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


2 Supermarket Stocks to Keep a Close Eye On

The Kroger Co.: This Zacks Rank #2 (Buy) company has been benefiting from its “Restock Kroger” program, which involves investments in an omnichannel platform, identifying margin-rich alternative profit streams, merchandise optimization and lowering expenses. The company’s well-defined customer segmentation strategy, emphasis on value and focus on its 'Our Brands' portfolio bode well. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kroger's strategic initiatives, including "Leading with Fresh" and "Accelerating with Digital”, are also noteworthy. KR’s digital business has become a key driver, powered by strategic initiatives like the Delivery Now program, the Boost membership program and the expansion of customer fulfillment centers. The Zacks Consensus Estimate for Kroger’s current fiscal year earnings EPS has risen by 1.2% to $4.39 in the past 30 days. This Cincinnati-based retailer’s shares have rallied 17.4% in the past year.

Price and Consensus: KR

Walmart: The supermarket giant has been benefiting from the strength of its highly diversified business, with contributions spanning various segments, markets, channels and formats.  This Zacks Rank #3 (Hold) company has been benefiting from an increase in both in-store and digital channel traffic, reflecting its adept navigation of the evolving retail landscape. Walmart is actively engaged in augmenting its product offerings and has a dedicated focus on renovating its stores, incorporating advanced in-store and digital innovations. The company has taken concrete steps to extend its presence in the thriving online grocery sector, a consistent driver of its e-commerce sales.

The Zacks Consensus Estimate for WMT’s current fiscal year earnings per share (EPS) has risen by 1.3% to $2.36 in the past 30 days. Shares of Walmart have rallied 32.3% in the past year.

Price and Consensus: WMT

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Walmart Inc. (WMT) - free report >>

The Kroger Co. (KR) - free report >>

Published in