Recent reports about improvements in the nation's employment situation and data about pricing could bode well for some traditional supermarket stocks, analysts said last week.
Most food retailers tracked by SN underperformed the market in the first quarter as concerns lingered about operators' ability to drive earnings growth amid both food-cost inflation and weakness on the jobs front.
“I think a lot of [the underperformance] has to do with the perception of how they are dealing with a consumer or household that is spending cautiously,” Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, told SN. “But the market seems to be willing to give standout performers — especially at the sales line — a better valuation, Whole Foods being a good example of that.”
Stock in Austin, Texas-based Whole Foods Market rose about 30% in the first calendar quarter as the company in February posted 9.1% same-store sales gains for its most recent fiscal quarter and issued a positive outlook for the year.
The chain benefited not only from the improved financial position of its customer base brought on by the gains in U.S. equity markets, but also from its differentiated position among food retailers, Cerankosky explained.
“For chains that are down in the trenches and competing with a wider swath of retailers — and you can put Kroger and Safeway in that camp — the market had much more of a ‘show-me’ attitude,” he said. “Not only show me sales growth, but show me earnings growth.”
Kroger Co., Cincinnati, was successful on that front, and enjoyed a 10% gain in its stock price during the first quarter, outpacing the major stock indices, which grew in the mid-single digits. Pleasanton, Calif.-based Safeway also reported positive trends in its most recent quarter but saw its stock rise only about 5%, slightly underperforming both the Dow Jones and S&P 500 indices.
Improving employment trends — reports last week indicated another weekly decline in new unemployment claims, and a national unemployment rate of 8.9% — should help traditional supermarket operators, Cerankosky said.
“There are two things in the jobs situation that are good for all retailers, and for the conventional food retailers in particular,” he said. “When you are working, or at least working more hours, you will spend less time shopping [alternative formats]. And, if a single-income household is back to a dual-income household, for example, that's more dollars they can spend.”
Increased consumer spending ability should be a boon, regardless of price increases, he said. “We've maintained that it's not so much a matter of inflation or deflation. It's a matter of each chain being able to attract enough customers to leverage their investments in inventory and building and labor costs.”
A report by Goldman Sachs last week said pricing trends bode well for some supermarkets, including Kroger and Safeway. An analysis of recent Nielsen data showed that product volume in the food, drug and mass retail channels was off only 0.5% amid a 3% increase in prices during a recent four-week span, an improvement over the 1.4% drop in volume in the preceding period.