A flurry of sales and earnings forecast revisions by food retailers during the last 10 days slammed industry stocks and raised more questions about how the inflationary environment is altering consumers' shopping habits.
Safeway, Supervalu, Delhaize and Costco all tempered their near-term outlooks for growth in either sales or profits, or both.
“Everyone is saying the same thing — that customers are changing their behavior, and that is having an impact,” said Meredith Adler, an analyst with Lehman Brothers, New York. “In some cases they are buying more product on ad, and that puts pressure on sales and margins. In other cases people are buying more private label, and that hurts sales but hopefully doesn't hurt profits.”
Some of the retailers also cited increased competition from discount formats, but as Costco illustrated last week, even those operators can get tripped up in an environment where costs are rising and consumer spending is weak.
In a conference call with analysts, Costco said net income for the current quarter will fall “well below” consensus estimates of $1 per share, although it declined to be more specific. Richard Galanti, Costco's chief financial officer, placed much of the blame on rising fuel prices.
“Primarily, it is rising energy costs and its many impacts,” he said. “It has impacted our freight cost at all levels of the merchandise distribution chain, and it's impacting the direct cost to merchandise.”
“We believe that pressure on earnings will likely continue as inflation remains high, consumer spending slows, and the competitive environment intensifies,” Deborah Weinswig, an analyst with Citigroup, New York, said in a research report.
Costco's warning came just a day after Supervalu tempered its outlook (see Page 6).
“Today's economic environment is quite different than we anticipated just a few months ago,” said Jeff Noddle, chairman and chief executive officer, Supervalu, during the company's first-quarter conference call. “The current economic downturn, as well as energy and food inflation, have had and continue to have a major impact on consumer purchasing behavior.”
Supervalu also cited increased inventory charges because of cost inflation and a slowdown in same-store sales growth due to economic pressure on consumers.
Brussels-based Delhaize Group, parent of Food Lion, Hannaford Bros. and Sweetbay, also said its sales and profit growth will be weaker than expected this year.
“In the U.S. as well as in our European markets, consumers are changing their spending behavior as a result of higher oil and food prices and the continued problems in the financial and real estate markets,” the company said. “They are trading down and purchasing fewer items per visit.”
The company projected operating profit growth of 0% to 3% for the year, vs. previous projections of 6% to 8% growth. Revenues are expected to grow 3% to 4.5%, vs. previous projections of 4% to 5.5%; and comps in the U.S. are now seen up 1.5% to 2.5%, vs. the 2.5% to 3.5% previously forecast.
As reported last week in SN, Safeway reduced its same-store sales outlook for the year to a range of 1% to 2%, down from previous projections of 2% to 2.3%.
“It's not clear that customers' perceptions of Safeway's prices are where they should be,” Adler told SN, noting that she questioned the company's strategy of cutting costs to achieve profit targets.