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Industry Stocks Lurch Ahead With Economy

Investors rewarded food-retailing companies that were well-positioned to cope with food-cost inflation, rising gas prices and the country's sluggish emergence from recession in the first half of 2011. Most of the food retailing and wholesaling stocks tracked by SN showed gains in the first half, and several outperformed the market overall, led by Whole Foods Market, Ruddick Corp., Winn-Dixie Stores,

Investors rewarded food-retailing companies that were well-positioned to cope with food-cost inflation, rising gas prices and the country's sluggish emergence from recession in the first half of 2011.

Most of the food retailing and wholesaling stocks tracked by SN showed gains in the first half, and several outperformed the market overall, led by Whole Foods Market, Ruddick Corp., Winn-Dixie Stores, United Natural Foods Inc. and Spartan Stores.

“Basically, the industry is recovering, similar to the economy,” said Andrew Wolf, a Richmond, Va.-based analyst with BB&T Capital Markets. “It's a slow, gradual recovery — a bounce back from a fairly horrific mid-2008 to mid-2010, and so that's reflected in the stock price performance overall.

(Click here for tables of half-year closing stock prices and gainers & decliners.)

“Consumers are slowly normalizing their behavior, favoring supermarkets over discount outlets, and some are either trading up or trading back to items they probably prefer. In addition, food-cost inflation is being reflected at the shelf without the adverse consumer reaction you saw in '08.”

Other retail stocks that rose in double-digit percentage gains through June 30 included Costco Wholesale Corp., Arden Group and Kroger Co.

Overall the SN Composite Index of 24 North American food retailing and wholesaling companies fell slightly in the period, down 0.85%, weighted by declines at Wal-Mart Stores and Target Corp. Traditional supermarket operators Village Super Market, Ingles Markets and Loblaw Cos. also lost value in the six-month span. The Fresh Market, after soaring in last year's initial public offering, also lost ground, as did Minneapolis-based wholesalers Nash Finch Co. and Supervalu, which both struggled to drive top-line gains.

The Dow Jones Index and S&P 500 rose 7.23% and 5.01%, respectively through the first six months of 2011 — about the median point for the industry stocks tracked by SN.

Chuck Cerankosky, an analyst for Northcoast Research, Cleveland, said those retailers that appeal to a more upscale consumer base tended to see sales gains in the first half, as did those with strong gas-rewards programs as higher fuel prices impacted shopper behavior.

“The big factor in the first half was the economy,” Cerankosky said. “Consumers have had a little more confidence, so they might put an extra item in the basket, or they might trade up in one category or another. It's still a cautious consumer, but where chains had exposure to some more upscale marketing areas, they benefited from consumers trading up.”

Cincinnati-based Kroger Co. — up 10.91% — benefited not only from sales gains driven by its strong price image in the market, but also through its fuel-rewards programs, analysts said.

“Our work shows that if you have a well-thought-out, well-executed gas program, where you are driving fuel savings through purchases in the store, it can be one of the most powerful promotions out there,” said Cerankosky.

Last month Kroger posted its 30th consecutive quarter of same-store sales gains, with a stronger-than-expected 4.6%, excluding fuel.

Wolf of BB&T noted that companies like Kroger that entered the economic downturn with a strong price image have better retained their market share during the downturn and have also enjoyed the flexibility of being able to pass along their cost increases more effectively.

“Kroger, because of its position in the market, it rightfully perceived to have pricing power,” he said. “They can pass through price increases because they are given permission by consumers — people know prices are up.”


That contrasts with Supervalu, which has been seeking to improve its pricing across its retail banners while at the same time incurring cost increases due to inflation. Supervalu's stock fell 2.28% through June 30.

Pleasanton, Calif.-based Safeway, meanwhile, is in a better position than Supervalu in terms of its pricing power, although not in as favorable a position as Kroger. It's share price gains of 3.91% in the first half reflected that middle position among the “big three” conventional chains.

“The stock performance [in the supermarket sector] is reflecting which companies are better able to pass along inflation with the least amount of adverse consumer behavior,” Wolf said.

Whole Foods, with a 9.1% same-store sales gain in its first quarter, saw benefits from increased spending by its more affluent consumer base, an improved pricing strategy and a more efficient operational structure, analysts said.

“Whole Foods deserves accolades for the way they tightened up the operating statement, top to bottom,” said Wolf, citing the company's focus on more efficient use of capital after a previously aggressive expansion effort with large stores.

The company's strategic pricing effort also has “helped them reinvigorate the franchise,” he said.

“Right when the market recovered for natural foods, they went to the customers and said their prices are better, and they went to Wall Street and said they are getting more customers, sales are up, and they are doing it more efficiently,” Wolf said. “Wall Street loves that.”

Similarly, Matthews, N.C.-based Ruddick Corp., up 18.19%, also benefited from an improving economy, smart pricing and a strong operating structure.

“Harris Teeter is probably the most well-differentiated food chain out there with the exception of Whole Foods,” said Cerankosky. “The company operates primarily against price competitors, but it has been able to do very well with a quality- and service-first merchandising plan.

“Their pricing is very competitive, the quality of fresh products is top notch, they have a pretty sharp expansion strategy that has been leveraging the chain's backstage operations, including the dairy, and it all has been working out nicely,” he said.

Among other gainers, Cerankosky said Jacksonville, Fla.-based Winn-Dixie, up 17.69% in the first half of 2011, has benefited from strong management driving better-than-expected results in a difficult Florida economy and against tough competition.

Grand Rapids, Mich.-based Spartan Stores, up 15.22%, also benefited from strong results in a difficult environment, he explained.

“They compete against three different flavors of supercenter, they are segmenting the market by merchandise assortment, and by format, and the result has been a nice recovery in the company's results, and a strong balance sheet, despite the extremely challenged economy in Michigan,” Cerankosky said.

SN HALF-YEAR CLOSING STOCK PRICES


CLOSE
6/30/11
CLOSE
12/31/10
AMT
CHANGE
PCT
CHANGE
Ahold 13.42 13.19 0.23 1.74
Arden Group 92.02 82.50 9.52 11.54
BJ's Wholesale Club 50.35 47.90 2.45 5.11
Costco Cos. 81.24 72.21 9.03 12.51
Delhaize (ADR) 75.36 73.71 1.65 2.24
Empire 55.90 55.82 0.08 0.14
Ingles Markets 16.55 19.20 -2.65 -13.80
Kroger Co. 24.80 22.36 2.44 10.91
Loblaw Cos. 38.95 40.37 -1.42 -3.52
Metro Inc. 47.99 45.20 2.79 6.17
North West Co. 20.24 20.62 -0.38 -1.84
Ruddick 43.54 36.84 6.70 18.19
Safeway 23.37 22.49 0.88 3.91
Supervalu 9.41 9.63 -0.22 -2.28
Target 46.91 60.13 -13.22 -21.99
The Fresh Market 38.68 41.20 -2.52 -6.12
Village 27.71 33.00 -5.29 -16.03
Wal-Mart Stores 53.14 53.93 -0.79 -1.46
Weis Markets 40.73 40.33 0.40 0.99
Whole Foods Market 63.45 50.59 12.86 25.42
Winn-Dixie Stores 8.45 7.18 1.27 17.69
WHOLESALERS
Nash Finch 35.81 42.51 -6.70 -15.76
Spartan Stores 19.53 16.95 2.58 15.22
United Natural Foods 42.67 36.68 5.99 16.33
INDICES
Dow Jones 12414.34 11577.51 836.83 7.23
S&P 500 * 1257.64 63.00 5.01
SN COMPOSITE * 1805.74 -15.39 -0.85
SN RETAILERS 1618.18 1633.48 -15.30 -0.94
SN WHOLESALERS 807.75 734.28 73.48 10.01

SOURCE: Data Network

SN HALF-YEAR GAINERS & DECLINERS

(Ranked by percentage change)


CLOSE
6/30/11
CLOSE
12/31/10
AMT
CHANGE
PCT
CHANGE
Whole Foods 63.45 50.59 12.86 25.42
Ruddick 43.54 36.84 6.70 18.19
Winn-Dixie 8.45 7.18 1.27 17.69
United Natural Foods 42.67 36.68 5.99 16.33
Spartan Stores 19.53 16.95 2.58 15.22
Costco Cos. 81.24 72.21 9.03 12.51
Arden Group 92.02 82.50 9.52 11.54
Kroger 24.80 22.36 2.44 10.91
Metro 47.99 45.20 2.79 6.17
BJ's Wholesale Club 50.35 47.90 2.45 5.11
Safeway 23.37 22.49 0.88 3.91
Delhaize (ADR) 75.36 73.71 1.65 2.24
Ahold 13.42 13.19 0.23 1.74
Weis Markets 40.73 40.33 0.40 0.99
Empire 55.90 55.82 0.08 0.14
Wal-Mart 53.14 53.93 -0.79 -1.46
North West Co. 20.24 20.62 -0.38 -1.84
Supervalu 9.41 9.63 -0.22 -2.28
Loblaw Cos. 38.95 40.37 -1.42 -3.52
The Fresh Market 38.68 41.20 -2.52 -6.12
Ingles 16.55 19.20 -2.65 -13.80
Nash Finch 35.81 42.51 -6.70 -15.76
Village 27.71 33.00 -5.29 -16.03
Target 46.91 60.13 -13.22 -21.99

SOURCE: Data Network