Supermarket Financial Positions Inching Ahead

The financial performance of supermarkets during the second half of 2012 is looking just a little bit better than the first half, industry analysts told SN.

A slowdown in inflation, combined with a slow but ongoing acceleration in the general economy, should produce second-half results that are “a smidge better than they’ve been,” Scott Mushkin (right), managing director for Jefferies & Co., New York, said. “The second half won’t be great, but it looks like it will be a bit easier for most companies.”

Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., also said he expects supermarkets to see modest volume gains in the second half “as the U.S. economy slowly improves and as long as food inflation doesn’t ramp up — though results could still be negatively affected by the fiscal crisis in the U.S. and the debt crisis in Europe.”

While food producers will face increasing costs due to the drought and herd liquidations, Wolf said he expects them to absorb those costs through the balance of 2012 before beginning to pass them through in the first half of next year.

Bryan Hunt, managing director for Wells Fargo Securities, Charlotte, said sales comparisons should be easier in the second half “because the very mild weather at the end of 2011 resulted in a lot of meals away from home, and a shift to more meals at home this year should produce better results.”

Raw material costs were volatile in the second half of 2011, Hunt added, “resulting in a lot of price calisthenics for supermarkets to be able to manage their costs. But less inflation to pass on to consumers during the second half of this year should contribute to better value propositions for conventional supermarkets.

“In addition, there was a pantry de-stocking in 2011 that led to weak Center Store sales, while more recent sales trends have flattened out, which implies a potential end to the de-stocking phenomenon.”

Click on the image for a larger version.

Chuck Cerankosky, managing director for Northcoast Research, Cleveland, was a bit more pessimistic than his peers, telling SN he does not expect much change in the industry in the second half, compared with the first. “There will be incremental improvements as the economy grows and employment numbers go up, but it will happen a bit at a time. Nothing will change for the better very quickly.”

The financial performance for the top 10 publicly held chains during the first half of 2012 were mixed, compared with their performance in the first half of 2011:

• Sales for the group were 3.5% better in this year’s first half.

• Operating income increased 1.2% in the half.

• Comparable-store sales were lower in the first half of 2012, rising an average of 1.5% in the first quarter of the calendar year, compared with an average increase of 1.8% in the prior year’s period; and increasing an average of 1.3% for the second quarter, compared with an average increase of 2.6% a year earlier.

Excluding the results at Whole Foods Market — which far outpaced any other operators — comps were up an average of just 0.7% in the first quarter of 2012, compared with 1.2% a year earlier; and up an average of 0.5% in the second quarter this year, vs. a 2% increase in last year’s second quarter.

According to Wolf (right) , inflation for the first half of this year was running at about 3.3%, “so virtually all the sales growth came from retail inflation. Sales were generally just a little stronger than the underlying inflation, with first-quarter volume flat to down and second-quarter volume flat to up.

“As a result, the stronger conventional players generally saw a little bit of improvement in volume trends as inflation dropped from 3.8% in the first quarter to 2.7% in the second — and while comparable store sales were still down in real terms, they were down less as volume improved.”

Read more: Bleak Expectations: Financial Pressures Worry Analysts

Wolf said food deflation drove strong first-half sales in the produce department, “which had a positive impact on overall tonnage, and as a result actual sales looked better than what was reflected in the Nielsen and [Symphony]IRI numbers,” Wolf added.

“Although inflation was a positive factor and had some impact during the half,” said Mushkin, “customers really weren’t seeing any improvement in their economic situations, meaning that whatever supermarkets gained on inflation, they lost on the negative reaction to higher prices.”

Most of the sales improvements during the half were driven primarily by inflation, he noted, “and the industry continued to struggle as middle-class shoppers had to deal with rapidly rising prices for everyday items like food, and employment levels were not great.”

Read more: Analysts Ponder: Is Kroger All It Can Be?

Cerankosky said the industry continued to face “a challenging sales situation” during the first half, with consumers remaining cautious and unwilling to trade up while the economic recovery remained slow and unemployment stayed high. “As a result consumers generally reduced discretionary purchases in their food budgets — often choosing to cut back on groceries to use the money for other purposes.”

Hunt said supermarkets were negatively impacted at the end of 2011 by “a lot of sales and earnings disappointments” that carried over into the first half of 2012.

Here are each chain’s results for the quarters most closely paralleling the first half of the calendar year: