Supermarket industry stocks turned in a mixed performance relative to the sharp run-up in the stock market during the first half of 1995.
Wholesale stocks outperformed the overall market during the period, while the top-10 publicly traded supermarket companies trailed the market as a group, according to SN data.
With overall stock prices up nearly 19%, prices on a group of 10 wholesale stocks registered gains of 27% as they rebounded from generally weak earnings. Prices on retail stocks for the top-10 chains rose 14% but trailed the market as investors moved their portfolios to other industries. However, analysts forecast that the retail group will perform better relative to the market in the second period.
Overall, the 50 food stocks in the SN Composite Index showed greater strength in the first half of this year than they did a year ago, with 40 stocks exhibiting gains and only 10 showing losses, compared with 18 gainers, 31 losers and one stock unchanged in the first half of 1994. The index includes retailers, wholesalers and companies with diversified operations.
The two top wholesale gainers were Canada-based companies -- Provigo, whose stock price rose 68.2%, and Metro-Richelieu, up 40.2% -- due to strong earnings gains, Canadian analysts told SN. They also said investor interest was piqued by Provigo's announcement that it plans to spend $250 million to upgrade 140 retail stores over the next three years.
Securities analysts attributed
price gains in U.S.-based wholesale stocks to the rebound effect for most companies after years of poor results. "When earnings rise, regardless of the reasons, investors take notice," Gary Vineberg, an analyst with Merrill Lynch, New York, told SN. "Supervalu was a terrible stock in 1994, and Fleming has been a terrible stock since 1992. But the expectation that both companies have hit bottom and will start to show improvements resulted in stock price gains for both wholesalers" -- 19.5% for Minneapolis-based Supervalu and 14% for Oklahoma City-based Fleming Cos., Vineberg said.
Analysts said Super Rite Corp., Harrisburg, Pa., whose stock price gain of 51.8% was the largest among all U.S. retail and wholesale companies, has been a good stock due to improvements in earnings for its Basics and Metro retail operations and the addition of new wholesale customers. But they noted that the stock price also benefited during the last week of the half from the announcement that Super Rite will be acquired by Richfood Holdings, Richmond, Va. Richfood's stock price rose 38.3% during the half. Prices on stocks of the major retail chains generally trailed the overall market during the half, analysts told SN, because investors preferred technology stocks to the more defensive-oriented supermarket group. However, they said the outlook for supermarket stocks during the second half is considerably brighter. Jonathan Ziegler, an analyst with Salomon Bros., New York, said retail stocks were generally out of favor during the first half "because of investor concerns about overstoring and a lack of exuberant same-store sales. "But investors realize that supermarkets are an all-cash business with fast turns, and that's the kind of business they want to invest in during a slow economy. So we should see a better performance for the group in the second half as the U.S. economy slows, because supermarket stocks will continue to deliver good earnings increases despite sluggish sales." Gary Giblen, managing director at Smith Barney, New York, said supermarket stocks outperformed the market in 1994, "and now other stocks have moved past them because of the tendency of investors to rotate into other groups." He said he expects supermarket stocks to outperform the market during the second half "because, with the market at new highs, people will be looking for safe havens in expectation of a leveling off or downturn in the market." According to Chuck Cerankosky, an analyst with Hancock Institutional Equity Services, Cleveland, supermarket stocks "seemed to be victims of benign neglect" during the first half. "At the beginning of the year, investors were attracted to more cyclical stocks, like paper and chemical companies, and in the second quarter they focused on technology stocks, which showed strong earnings. "But for the balance of the year, with the price-earnings index rising, more attention will focus on the supermarket group because earnings are better -- and if investors begin worrying about the outlook for the economy through early 1996, they may take more defensive investment positions by moving to supermarket stocks." The 10 supermarket stocks used in calculating the earlier mentioned retail percentage gain are Kroger Co., American Stores, Safeway, Albertson's, Winn-Dixie Stores, A&P, Food Lion, Ahold, Vons Cos. and Stop & Shop Cos. The 10 wholesale stocks used for that sector's percentage gain are Fleming Cos., Metro-Richelieu, Nash Finch Co., Richfood, Schultz Sav-O, Super Food Services, Super Rite Corp., Supervalu, Oshawa Group and Provigo.
Following are analysts' comments on winners and losers during the first half of 1995:
RISER FOODS, Bedford Heights, Ohio, whose stock price increased 50%, "emerged from a period of overleveraging about three years ago, and it has been devoting more cash flow to capital spending since then, which has impressed investors," Cerankosky said. "And they've also been impressed at consumers' positive reaction to the chain's remodeled Stop-N-Shop stores and to its new Marketplace format. And as Riser's business has improved, it has resulted in both sales growth and improved profitability."
A&P, Montvale, N.J.: Its stock rose 45.5% "as the company engineered a reasonably good recovery in the first quarter of 1995 -- the first quarter in nearly four years in which operating results improved," said Ed Comeau, an analyst with Lehman Bros., New York. "And with losses stemmed in Canada following resolution of labor problems last year and its overall business stabilized, investor interest in A&P has been reawakened."
BRUNO's, Birmingham, Ala., whose stock was up 38.8%, "clearly benefited from the announcement in April that it would be acquired by Kohlberg Kravis Roberts & Co.," the New York-based investment firm, Vineberg said. "Bruno's had showed some signs of improvement after bottoming out after several years of declining earnings, but it benefited from more than a year of rumors that it was a takeover candidate and finally from the KKR acquisition."
GIANT FOOD, Landover, Md.: Its stock was up 30.5%, "largely due to a more stable operating performance, although that level of performance was just OK," Comeau said. "But due to Giant's expansion into Pennsylvania and New Jersey, it's perceived to have a faster, higher-term level of growth. "And another positive influence was the stronger equity position taken in Giant by Sainsbury."
SMART & FINAL CO., Los Angeles, saw its stock rise 22.3% "because its comparable-store stores, like overall sales, have been industry-leading, despite the California recession," Ziegler said.
SAFEWAY, Oakland, Calif.: Its price was up 17.3% "because it had the best operating and financial performance in the industry, and because of investors' increasing perception of the quality of the company and its management," Giblen said.
VONS COS., Arcadia, Calif., had an increase of 11.8% "following eight consecutive quarters of improving comps," Ziegler said. "And although comparisons are easier this year because of negative numbers a year ago, the trend is obviously in the right direction."
ALBERTSON'S, Boise, Idaho, was up 2.2% "because same-store sales momentum has slowed, and investors fear earnings will ultimately be impaired," Giblen said. · STOP & SHOP COS., Quincy, Mass.: Its stock edged up 0.5% "because of weak same-store sales -- due partly to cannibalizing its own stores and partly to ongoing weaknesses in the New England economy," Comeau said.
QUALITY FOOD CENTERS , Bellevue, Wash., was down 17.1% "because of mediocre financial results and a leveraged recapitalization that shrunk the size of the company in the public market by 50% and created leverage in a company that has had a pristine balance sheet, with no debt," Giblen said.
SMITH'S FOOD & DRUG CENTERS, Salt Lake City: Its stock was down 21.4% "because it's takxen its eye off the ball in operations and merchandising and consequently lost market share to Fred Meyer in Utah, Albertson's in Arizona and Jewel Osco in New Mexico," Ziegler said. He also noted that same-store sales dropped 5.2% in the first quarter and an estimated 3% during the current quarter.
