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Supermarkets Industry Outlook Eclipsed by Margin Concerns

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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 among others. Nevertheless, food retail accounts for a chunk of their business.

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

  • Supermarket players are benefiting from the burgeoning demand for essential items amid the coronavirus outbreak that has compelled consumers to maintain social distancing and hoard stocks. Items such as toilet paper, disinfectants, masks, gloves, packaged water, infant supplies medicines, groceries and other staple products have registered a spike in demand — thereby boosting revenues of supermarket retailers. Higher stay-at-home trends are largely aiding digital sales.
  • Supermarket retailers are likely to keep gaining from their efforts to enhance store and e-commerce experience. Companies are set to gain from store expansion and remodelling, merchandise enhancement endeavors, product innovation, prudent pricing strategy and efforts to replenish assortments. Further, supermarket companies have been stepping up their omni-channel game through alliances, mergers and acquisitions. Also, these companies are adopting numerous ways to improve their delivery and payment systems, in particular, to expand in the booming online grocery space. To this end, companies’ same-day and last-mile delivery services, and buy online and pick-up in store facilities bode well. In fact, companies widening the delivery options have been a boon amid the pandemic — helping them cater to the soaring demand stemming from increased stay at-home trends.
  • Investments associated with e-commerce development and compelling pricing strategies have been weighing on margins. Further, margins are seeing increased pressure amid the pandemic due to investments in pay and benefits for frontline team members, shift in channel mix toward digital fulfillment, transition toward lower-margin categories, and decline in sales of higher-margin discretionary items. Though supermarket players are expected to continue witnessing improved revenue trends, a higher mix of e-commerce sales and the aforementioned costs might be limiting factors.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #179, which places it in the bottom 29% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming less confident about this group’s earnings growth potential. Since the end of February 2020, the industry’s consensus earnings estimate for the current year has slipped 2.6%.

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

Industry Outperforms the S&P 500

The Zacks Retail – Supermarkets industry has outpaced the S&P 500 composite, while it has underperformed the broader Zacks Retail – Wholesale sector over the past year.

The industry has rallied 13.7% over this period compared with the S&P 500’s growth of 10.5%. Meanwhile, the broader sector has gained 21.4% 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 22.03X compared with the S&P 500’s 23.06X and the sector’s 32.96X.

Over the past five years, the industry has traded as high as 22.48X and at the median of 17.19X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Rising demand for essential items amid the coronavirus-led stay-at-home trends is boosting revenues of supermarket players. Companies are especially gaining from stellar digital sales, courtesy of their focus on enhancing delivery services. However, increased mix of e-commerce sales, costs associated with COVID-19, compelling pricing and intense competition might keep margins under pressure.

All said, we are presenting stocks from the Retail – Supermarkets universe that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Kroger Co. (KR - Free Report) , which has gained 35.4% in the past year, currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current fiscal earnings per share (EPS) has remained unchanged in the last 30 days. Kroger, which surpassed earnings estimates by an average of 2.1% in the trailing four quarters, carries a long-term EPS growth rate of 4.9%.

Price and Consensus: KR

Walmart Inc. (WMT - Free Report) : The world’s largest retailer has gained 12.8% over the past year. This Zacks Rank #3 (Hold) company has outpaced the consensus mark by 3.6%, on average, in the preceding four quarters. Further, the supermarket biggie has a long-term EPS growth rate of 5%.

Price and Consensus: WMT

Ingles Markets, Inc.
(IMKTA - Free Report) has an estimated long-term earnings growth rate of 10.2%. The Zacks Rank #3 company’s estimate for the current fiscal EPS has remained unrevised over the last 30 days. Also, shares of the company have surged 42.5% in a year.

Price and Consensus: IMKTA

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