Inflation can’t save industry stocks

All of the traditional U.S. supermarket stocks lost value through the first three quarters of 2017 as investors seem to feel that Amazon/Whole Foods and Walmart are better prepared for the future of food shopping.

Even as the Dow Jones Industrial Average and the S&P 500 soared 13% and 12%, respectively, through the first nine months of the year, most supermarket shares fell by that much or more.

Kroger Co., for example, fell more than 40% from the start of the year through the end of September, and only gained a tiny fraction of that back after last week’s announcement that it would consider a sale of its convenience store operations and invest in digital and merchandising initiatives.

The declines in supermarket share prices have come even though the reversal of deflationary food-pricing trends, which had pressured the industry’s top and bottom lines, may be poised to help boost food retailers’ results.

“While some food retailers might think the worst is behind them given the long-awaited return of inflation, we would argue [that] the worst is yet to come,” said Karen Short, and analyst with Barclays Capital, in a research note last week. “Amazon’s acquisition of Whole Foods will dramatically alter the food retail landscape – conventional, specialty, natural and organic – [and] no retailer selling food will be unscathed, in our view. Amazon will endeavor to dominate the e-commerce segment of food at home, and alternate formats will continue to take share.”

Even if inflation helps traditional grocers begin to show improved financial performance, they face significant challenges in attracting investor interest and regaining value this year, said Bill Kirk, an analyst with RBC Capital Markets.

“The Amazon fear is so pervasive that even decent near-term results may not be enough,” he said. “The narrative simply shifts from, ‘Amazon is destroying grocery’ to ‘Amazon just hasn’t destroyed grocery yet.’”

In addition to Kroger, other traditional operators losing value through the first nine months of the year included Ahold Delhaize, down 21.5% through the first three quarters; Ingles Markets, down 46%; Village Super Markets, down 20%; and Weis Markets, down 35%.

SpartanNash and Supervalu, the country’s largest publicly traded wholesaler/retailers, were down 34% and 35%, respectively. United Natural Foods Inc., the organic and specialty product wholesaler that supplies Whole Foods and other retailers, was down about 15.8% through the first three quarters of 2017.

Shares of Natural Grocers by Vitamin Cottage, the small-format organic specialist, have lost more than half their value this year.

Sprouts Farmers Market was one of the few stocks to more or less hold its own in the first nine months, buoyed by speculation that it could be an acquisition target in the wake of Amazon’s purchase of Whole Foods.

Industry stocks took another hit on Monday as Telsey Advisory Group reduced its estimates on Supervalu, according to reports, in anticipation of that company’s second-quarter earnings report this Wednesday.

By contrast Walmart Stores shares were up nearly 13% for the year, in line with the major stock indices, as the company remained aggressive on pricing, invested in its e-commerce operations and made noticeable improvements to its in-store product presentation, particularly around perishable grocery items, analysts said.

The Bentonville, Ark.-based retailer has recently increased its pricing advantage over its rivals, according to a report issued Monday by Gordon Haskett Retail Advisors. That report, which surveyed a basket of 68 items in five major markets around the country, found that Walmart widened its price advantage on Kroger, Target, Albertsons and Randalls.

The publicly traded Canadian grocery chains, meanwhile, appear to have remained immune to the fears that investors have for U.S. supermarket operators. While Loblaw Cos. was down slightly through the first three quarters of 2017, both Empire Cos. and Metro saw gains in their share price.

Peter Sklar, an analyst with BMO Capital Markets in Canada, said the Whole Foods’ presence in Canada is so limited that Amazon’s acquisition is likely to have little effect on Canadian supermarket operators.

“We believe the impact of this transaction on the Canadian grocery market is minimal at this point in time,” he said in a research report. “Whole Foods is only a small, niche player in the Canadian grocery landscape, and its offering is so limited that it effectively does not have any competitive impact.”