Whole Foods Leads Industry Stocks Again in 2011

NEW YORK — Investors clearly rewarded the best-managed food retailers in 2011, according to analysts, as chains like Whole Foods Market, Ruddick Corp., Costco Wholesale and Kroger Co. all saw stock-price gains that exceeded the market.

Companies that lost market share in 2011 or struggled to hang onto share, such as Supervalu and Nash Finch Co., saw double-digit declines in their share prices.

To some extent the performance of the “big three” traditional supermarket companies — Safeway, Kroger and Supervalu — reflected how the market viewed the supermarket sector in 2011. Kroger saw gains in market share and earnings and a corresponding rise in stock value (up 8.32% for the year); Safeway struggled to hang onto market share and saw its share-price slide (down 6.45%); and Supervalu lost market share and suffered a share-price plunge of 15.68% in 2011.

“Kroger is the only one that’s had a little bit of market share gain and a little bit of earnings gain, and it’s being rewarded for that,” said Andrew Wolf (right), a Richmond, Va.-based analyst with BB&T Capital Markets. “Kroger’s quarterly earnings are a little erratic, and they get punished for that, but overall their execution has proven to be good.”

The outlook for the current year appears somewhat brighter for the industry as a whole, analysts said, providing the economy continues to show signs of improvement and inflation remains manageable.

“2012 probably should be a better year for food retailing, primarily because of product costs, which should abate, and if the economy continues to improve,” said Wolf. “It’s not a great environment, but it is better than we have seen in the last couple of years. We could end up with nominally positive same-store sales [in the industry], and gross margins could be slightly better.”

Karen Short (left), a New York-based analyst with BMO Capital Markets, noted that gas prices “could be a wild card” in 2012, but overall, “It doesn’t appear there is any reason to think the environment will get any worse for any of these retailers.”

The sharp inflationary and deflationary periods of the preceding years made for a much more difficult operating environment, analysts noted. In 2011, although moderate inflation returned, the potential benefit was dampened at many retailers because of weakness in consumer spending power, at least for retailers serving middle- and lower-income households.

Retailers at the high end — such as Whole Foods and Ruddick Corp.’s Harris Teeter chain — enjoyed the benefit of strong spending among the highest earners, which the companies were able to leverage to their benefit through their own strong operational expertise, analysts pointed out.

“It was pretty much an ideal environment for the supermarkets that primarily sell to the top quarter in income,” said Wolf. “The upper quarter of earners were spending normally, as in a normal economic recovery.

“For those retailers, primary demand was excellent, volume was excellent, and they also had pricing power, so they were able to pass along inflation. That’s about as good as it gets for a food retailer, to have strong primary demand and to have pricing power.

“For everyone else, the demand conditions were challenging.”

Austin, Texas-based Whole Foods Market — one of the top stock performers for the last three years — again led the pack in 2011, with a share-price gain of 37.54%. Matthews, N.C.-based Ruddick Corp. was not far behind on the list of top gainers with a share-price increase of 15.74%.

Other gainers included Winn-Dixie Stores, Jacksonville, Fla., up 30.64% following its agreement to be acquired by privately owned Bi-Lo; Montreal-based Metro Inc., up 19.47%; and Issaquah, Wash.-based Costco Wholesale, up 15.39%.

Overall the 23 North American food retailing stocks tracked by SN performed in line with the Dow Jones Industrial Average, and outperformed the S&P 500 Index. The SN Composite Index, a weighted measure compiled for SN by Huntington, N.Y.-based Data Network, rose 5.13% for the year, vs. 5.53% for the DJIA and a flat performance by the S&P 500.

In addition to enjoying the benefits of high spending by top-income households, Whole Foods also managed to keep its operating costs in check, particularly store-level labor, Wolf pointed out.

“One thing they did that helped their earnings is they took their labor rates down a lot — down almost 25% in the last two years,” he said. “Their labor productivity shot through the roof.”

In addition, the company has had success battling its longstanding image as being high-priced, Wolf said, primarily through the use of traditional means such as coupons and price specials.

“Whole Foods is just doing a lot of things right, and one of the things is that their value image is much better than it was,” he explained.

Short agreed that Whole Foods benefited both from strong management and the spending power of its target demographic.

Although she said she thinks the company’s stock could be “flattish” in the near term, she is optimistic on its performance going forward, given the company’s strong fundamentals and other factors. “It’s very hard not to like that story,” she said.