Retailers Lag in Recovery

If the overall U.S. economy is improving — as a resurgent stock market seems to suggest — signs of that recovery have yet to appear in the aisles of grocery stores.

Citing continued uncertainty from consumers, along with a sales-growth headwind in the form of product-price deflation — analysts are expecting to hear grim news from food retailers reviewing the fiscal third quarter in the coming weeks. And although most major stock indexes have seen improvement this year, a recovery among grocery shares will likely lag.

“What we've seen so far from the grocers wouldn't indicate there's any kind of recovery going on. In fact, it seems that the consumer is more pressured, not less,” Karen Short, an analyst for BMO Capital Markets, New York, told SN. Short last week lowered her quarterly earnings-per-share estimates on Safeway, Supervalu and Winn-Dixie Stores, citing the deteriorating sales environment and increasing deflationary pressures.

The overall market is bouncing back in the meantime. The Dow Jones Industrial Average neared 10,000 last week while marking the first anniversary of its Sept. 29 plummet, and it was up 7.2% for the calendar year through Sept. 30. The S&P 500 was up 13.4% for the calendar year. The SN Composite Index, comprising 24 retailer and wholesaler stocks, fell by 6.8% in the same period.

Supermarket companies will begin reviewing quarterly results next week when Safeway reports its fiscal third quarter. Supervalu and A&P are scheduled to review quarterly results Oct. 20.

Short said she expected a tough quarter for grocers, but added, “Most of the expectations seem pretty low, so I'm not sure there's a lot of downside to the stocks. But on the other hand, I don't think there's any reason to expect any upside.”

Short's pessimistic view of the industry is in large part due to price deflation, which has increased in recent months and pressured sales as a result. She also cited Kroger's second-quarter results when readjusting estimates for Safeway and Winn-Dixie. Kroger in that period grew same-store sales by 2.6% but only as a result of aggressive promotions that adversely affected earnings.

“Kroger is by far the strongest retailer of the group, so it seems unlikely Winn-Dixie will weather the current environment unscathed,” Short wrote in a research note.

Behavioral changes by shoppers are another concern. Kroger in its second-quarter review last month noted an increasing pattern of shoppers spending more heavily in the first weeks of the month and tailing off near the end.

“The story is customer attrition to Wal-Mart and other venues where there's better perceived value. And when customers do come in the stores, they're buying less stuff,” Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va., told SN. “Deflation only exacerbates it, contributing to lower same-store sales and some de-leveraging.”

Wolf, however, added that deflation in categories such as milk and produce can help retailers like Safeway that are trying to improve their overall price image. “Some of the deflation is allowing the grocers to show some real value, and let the farmers fund it,” he explained. “They're funding a lot of the lower prices the retailers would need anyway.”

Analysts said they wouldn't expect to see improvements from food retailers at least until comparisons get easier next year, and moderate inflation resumes.

Supermarkets historically have tended to be “defensive” plays that ease into a recession better, but recover more slowly, than the overall market, Wolf said.

NO RECOVERY