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Outlook for Supermarkets Industry Rosy on Omnichannel Strength

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The Zacks Retail – Supermarkets industry encompasses retailers offering 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. Industry players operate through formats such as supermarkets, multi-department stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs, among others. Notably, food retail remains a vital part of their business.

Let’s take a look at the three major industry themes:

  • A buoyant consumer environment, marked by a strong labor market, higher disposable income and an uptick in confidence index indicates bright prospects for the consumer-driven supermarkets industry. Major supermarket retailers are likely to maintain their impressive comparable store sales or comps trend, through 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 assortment replenishments.
  • Amazon’s (AMZN - Free Report) entry in the grocery space compelled quite a number of players to chalk out better strategies to survive the competitive frenzy. Incidentally, companies have been improving their omni-channel game through M&A activities and alliances. Also, supermarket industry players are adopting different approaches to enhance delivery and payment systems in a bid 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 development and a compelling pricing strategy have been creating pressure on margins. Also, competition from private-label brands, increased transportation costs and food cost inflation remain headwinds. Tariff impact of the trade war also raises concerns for companies with significant exposure to China. Though supermarket players are expected to witness improved revenue trends, a higher mix of e-commerce sales poses threats to 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 #89, which places it in the top 35% 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 favorable 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 3.8%.

Given the robust 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 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 21.2% over this period, better than the S&P 500’s increase of 3.8% and the sector’s drop of 0.6%.

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 21.42X compared with the S&P 500’s 17.07X and the sector’s 23.83X.

Over the past five years, the industry has traded as high as 23.3X, as low as 12.54X, and at the median of 17.05X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Companies in the Retail – Supermarkets space are likely to benefit from efforts to enhance digital and brick-and-mortar operations. However, increased mix of e-commerce sales, ramped-up promotional activities, compelling pricing and stiff competition remain threats to margins.

We are presenting a stock with a Zacks Rank #1 (Strong Buy), one with a Zacks Rank #2 (Buy) and two stocks with a Zacks Rank #3 (Hold) from the Retail – Supermarkets universe. 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 14.5%. The Zacks Rank #1 stock has gained 18% in a year. The Zacks Consensus Estimate for its current-year EPS has remained stable in the last 30 days.

Price and Consensus: IMKTA

Walmart Inc. (WMT - Free Report) : This world’s largest retailer has rallied 26.3% over the past year. The Zacks Consensus Estimate for its current-year EPS has remained stable in the last 30 days. The Zacks Rank #2 company boasts an impressive earnings surprise history. Also, this supermarket biggie has a long-term EPS growth rate of 4.7%.

Price and Consensus: WMT

The Kroger Co. (KR - Free Report) : This grocery retailer has a long-term EPS growth rate of 6.3%. The Zacks Consensus Estimate for its current-year EPS has risen in the last 30 days. The Zacks Rank #3 company has delivered back-to-back positive earnings surprises in the last two quarters and has seen its shares jump close to 8% in the past six months.

Price and Consensus: KR

Companhia Brasileira de Distribuicao (CBD - Free Report) carries a Zacks Rank #3. The Zacks Consensus Estimate for its current-year EPS has remained stable in the last 30 days.

Price and Consensus: CBD

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