Major grocery chains such as The Kroger Co. (KR Quick QuoteKR - Free Report) , Whole Foods Market, Inc. and Sprouts Farmers Market, Inc. (SFM Quick QuoteSFM - Free Report) are going through a rough patch. Analysts believe that industry-wide weakness is hurting the margins of these supermarket chains. Stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing these providers of daily need items.

The impact of these is clearly visible from stock’s performance so far in the year. While Sprouts Farmers Market and Kroger have plunged 21.5% and 14.1%, respectively, year to date, Whole Foods has shown resiliency and declined 3.6%.  Moreover, we noticed that all the three stocks have underperformed the Zacks categorized Retail-Wholesale industry that has witnessed an increase of 4%.

Let’s Delve Deep

Shares of Sprouts Farmers Market came under pressure, as management reiterated its full-year 2016 earnings projection of 83–86 cents a share, despite reporting better-than-expected comparable-store sales in the third quarter. Comparable-store sales increased 1.3%, while the company had expected it to remain flat. Moreover, the bottom line performance hurt investor sentiment. The quarterly earnings declined roughly 24% and fell short of the Zacks Consensus Estimate by about 6%.

Stiff competition, deflationary environment and cautious consumer spending are also making things tough for Kroger. A clear reflection of this was evident when Kroger succumbed to a negative earnings surprise in the third quarter, following an earnings beat in the preceding two quarters of fiscal 2016. Further, the company barely extended its identical supermarket sales growth (excluding fuel) for about 52-successive quarters. The tough operating environment compelled management to narrow its fiscal 2016 earnings projection and provide a bleak outlook for fiscal 2017. (Read: Kroger Q3 Earnings Misses, Sales Beat; Narrows View)

Coming to Whole Foods, the stock has been grappling with waning comparable-store sales performance since the past five quarters. Comparable-store sales declined 2.6% in the fourth quarter of fiscal 2016. Comps had fallen 2.6%, 3% and 1.8% in the third, second and first quarters of fiscal 2016, respectively, and 0.2% in the final quarter of fiscal 2015. During the first five weeks of the first quarter of fiscal 2017, comps dropped 1.6%.

Nevertheless, Whole Foods has been revamping its pricing strategy and concentrating on value offerings. It has launched a new store concept, "365 by Whole Foods Market" to target millennials and stave off competition that has been hurting its performance.

Bottom Line

The grocery business is highly competitive and fragmented. Moreover, with more companies entering as well as expanding their presence, it is becoming tough for the existing players to retain their market share. Whole Foods and Sprouts Farmers Market currently carry a Zacks Rank #3 (Hold), while Kroger holds a Zacks Rank #4 (Sell). Market experts believe that short-term investors should shift their focus from grocery stocks at least for the time being and bet their bucks on other lucrative counters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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