The Zacks Retail – Supermarkets industry consists of supermarket retailers, which offer grocery, electronics, stationery, health and beauty aids, home furnishings, household chemicals, hardware and paint, sporting goods, fabrics and crafts, automotive accessories, entertainment products and much more. Players in the industry operate through supermarkets, multi-department stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs, among other formats. Markedly, food retail accounts for a chunk of their business.
Let’s take a look at the three major industry themes:
- Thanks to a robust job market and higher disposable income, the consumer environment is quite favorable. This highlights the bright prospects of the consumer-driven supermarkets industry. Major supermarket retailers are likely to keep the solid comps trend alive, courtesy of efforts to enhance store and e-commerce experience. As brick-and-mortar is still largely important (especially for grocery shoppers), companies are set to gain from store expansion and remodelling, innovation, merchandise enhancement endeavors, compelling pricing strategy and efforts to replenish assortments given consumers’ willingness to spend on premium and organic foods.
- Well, the industry underwent a massive change after Amazon (AMZN - Free Report) took over Whole Foods Market in 2016. The online giant’s move compelled quite a number of players to chalk out better strategies to survive the competitive frenzy. Incidentally, companies have been stepping up their omni-channel game through M&A activities and alliances. Also, supermarket industry players are adopting different ways to improve delivery and payment systems to expand in the booming online grocery space. Toward this end, companies’ same-day and last-mile delivery services, and buy online and pick up in store facilities bode well.
- Investments associated with e-commerce developments and the compelling pricing strategy have been building pressure on margins. Also, competition from private-label brands, elevated transportation costs, high wage expenses and food cost inflation remain headwinds. Increased tariffs on Chinese imports also raise concern for companies with significant exposure to China. Though supermarket players are expected to continue witnessing improved revenue trends, a higher mix of e-commerce sales and the aforementioned costs may offset the benefits.
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 #43, which places it in the top 17% 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.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of an impressive earnings outlook for the constituent companies in aggregate. 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 end of October 2018, the industry’s consensus earnings estimate for the current year has increased 1.8%.
Given the promising prospects, we present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Beats on Stock Market Performance
The Zacks Retail – Supermarkets industry has performed better than the Zacks S&P 500 composite as well as the broader Zacks Retail – Wholesale sector over the past year.
The industry has rallied 20.1% over this period, better than the S&P 500’s increase of 6.7% and the sector’s rise of 5.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 19.2X compared with the S&P 500’s 16.7X and the sector’s 23.6X.
Over the past five years, the industry has traded as high as 23.3X, as low as 12.5X, and at the median of 16.5X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
Companies in the Retail – Supermarkets space are likely to gain from omni-channel efforts, given the significance of both digital and brick-and-mortar operations. However, increased mix of e-commerce sales, elevated promotions, compelling pricing and intense competition may keep margins under pressure.
While none of the stocks from the Retail – Supermarkets universe currently sport a Zacks Rank #1 (Strong Buy), we are presenting two stocks with a Zacks Rank #2 (Buy) and one stock with a Zacks Rank #3 (Hold). These are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingles Markets, Incorporated (IMKTA - Free Report) has an estimated long-term earnings growth rate of 8%. The Zacks Rank #2 company has seen its estimates for the current-fiscal EPS jump 3% over the last 30 days. Shares of the company have gained 5.1% in a year.
Price and Consensus: IMKTA
Companhia Brasileira de Distribuicao (CBD - Free Report) also carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has remained stable in the last 30 days. Companhia Brasileira has a long-term EPS growth rate of 14.8%.
Price and Consensus: CBD
Walmart Inc. (WMT - Free Report) : This world’s largest retailer has gained close to 24% over the past year. The company, which has seen its earnings estimates for the current fiscal increase over the past seven days, currently carries a Zacks Rank #3. Also, Walmart boasts an impressive earnings surprise history, while the supermarket biggie has a long-term EPS growth rate of 4.6%.
Price and Consensus: WMT