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“Retailers were achieving decent, nominal sales and earnings during the second half of 2011, though there was actually a slowdown in real sales growth because of inflation.”
— Andrew Wolf, BB&T Capital Markets
The second half “was a period of tough sledding for the industry as a whole because inflation was running amok."
— Scott Mushkin, Jefferies & Co., New York
The willingness by supermarket operators to pass through price increases from food inflation enabled them to achieve nominal sales gains during the second half of 2011, though there was little real sales progress, according to industry analysts.
The combination of inflation in food and gas prices for the next few months is likely to mean more of the same for supermarkets during the first half of 2012, they told SN.
Food inflation amounted to approximately 6% in 2011, meaning second-half sales for the top 10 chains with public equity or debt were essentially flat — up 6% on a weighted average, compared with gains of 1.85% in the second half of 2010.
On a comparable-store basis, sales rose an average of 3.7% in the third quarter of the calendar year and 2.8% in the fourth quarter — impacted to some extent by unseasonably warm weather in many parts of the U.S., analysts pointed out — compared with an average decline of 0.4% in the third quarter of 2010 and an increase of 0.9% in the prior year’s fourth quarter.
Operating income improved during the half, with the weighted average for the 10 chains down just 0.8%, compared with a drop of 5.4% for the same period a year earlier.
As retailers move through the first half of 2012, they are keeping pricing rational and seeing a slight uptick in consumer confidence, though rising gas prices could have a significant impact on where the numbers end up, the analysts said.
“Retailers were achieving decent, nominal sales and earnings during the second half of 2011, though there was actually a slowdown in real sales growth because of inflation,” Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., told SN. “With inflation, real sales growth actually worsened between the third and fourth quarters.”
Inflation at the producer level was running at just over 4% through the first quarter of 2012, “so supermarkets are still passing those costs on with higher retail prices, but the gap is closing in favor of the retailers,” Wolf said, “and while there will continue to be weak real sales trends through the first half of this year, gross margins may firm.”
Scott Mushkin, managing director for Jefferies & Co., New York, said the second half “was a period of tough sledding for the industry as a whole because inflation was running amok, which created volume challenges throughout the industry as consumers in the $50,000-a-year range began to struggle.”
He said he does not see much change during the first half of this year, “unless inflation calms down and we see more middle-class wage growth, though gas prices will keep the pressure on.”
Chuck Cerankosky, managing director for Northcoast Research, Cleveland, said consumers were cautious during the half “because inflation in both food and gas prices remained highly bothersome.”
He anticipates a slow improvement in the economy during the first half of this year, “but that’s likely to be helpful to only those companies that had sales momentum entering the year — Kroger, Whole Foods, Harris Teeter and Costco, all of whom have strong value credentials.”
Wolf said there is “a strong correlation between gas prices and real sales growth for supermarkets. In a stagnant economy like the one we’re in, a consumer who has to put $50 to $100 more in his gas tank and then spend $50 more at the supermarket to cover food inflation will be under a real strain.”
Gary Giblen, an industry analyst, offered similar comments. “Gas is a non-discretionary expense because people need what they need to get to work and do everything else they must do, and that could force some consumers to trade down. Some economists say people are used to high prices, but as those prices keep going up, it’s bound to have a negative impact on shopping habits.”
The following pages include an analysis of the financial performance of each of the 10 chains in the second half of 2011.