Walmart earnings report hits grocery stocks

Apparently when Walmart sneezes, the supermarket industry catches a cold.

Supermarket stocks were down broadly yesterday, after Walmart released its fourth quarter and fiscal year-end earnings, missing Wall Street expectations.

Take The Kroger Co., the nation’s largest traditional supermarket operator, for example. Kroger shares plummeted from $28.78 Friday to a low of $27.27 on Monday before rebounding somewhat. By mid-afternoon on Wednesday, Kroger shares were trading at $27.98.

Kroger’s situation was not unique. Weis Markets saw unusually high volume yesterday, with 221,121 shares trading hands on 1,400 different trades, losing 4.94% of its value to close at $37.55, according to Equities.com. Typically, shares in the Sunbury, Pa.-based supermarket chain average a daily volume of 105,292 shares. In mid-day trading today, Weis had rebounded to $38.65, up $1.10, or 3.93%.

“Generally speaking, when a stock experiences a sudden spike in trading volume, it may be seen as a bullish signal for investors,” Equity.com wrote in its research paper.

“This market has been an event-driven market, where if something goes wrong, every stock connected with that event takes a hit,” Chuck Cerankosky, managing director, equities research analyst, principal, at Northcoast Research in Cleveland, told Supermarket News. “In the case of Walmart, where they stumbled was in e-commerce. They made a big bet on chasing Amazon, but it is not contributing as expected to earnings growth at the company, and fourth quarter sales were less than expected.” He added that other brick-and-mortar retailers are getting better and more profitable at selling via e-commerce by peddling specialized offerings.

Brian Yarbrough, consumer research analyst at Edward Jones in St. Louis, said it was not Walmart’s sales results that impacted the grocery stocks sector of the market. “I think it is more what Walmart said on their earnings call. Some of their comments are probably what is having a greater impact on the grocery store stocks,” he said.

Those included comments by Walmart Inc.’s president, CEO and director, C. Douglas McMillon, and Brett M. Biggs, CFO and executive vice president, that Walmart is going to continue to lower prices and invest in online groceries and curbside pickup, Yarbrough said.

“We’re going to continue to invest in price,” Biggs said during the earnings call. “We’ve been investing in price. As you know, we always invest in price. But we’ve been investing in price over the last couple of years, and so now we’re two years into that…I don’t want to get into specific pieces from a competitive standpoint that we feel confident that the gross margin decrease that we will see next year will be less than what we’ve seen in the fourth quarter.”

Yarbrough noted that Walmart resumed its historical image of rolling back prices within the past year and a half. “During the prior five or six years before they started doing that and got back on top of their game, a lot of grocery stores, such as Albertsons and Kroger, were taking market share back from Walmart,” Yarbrough said. “Walmart had been losing share in grocery, now they’ve gotten back on top of their price game, doing things within the store and adding labor hours and Walmart is now doing a lot better, which is just hurting the grocery stocks.”

During the earnings call Walmart officials talked about expanding online delivery and curbside pickup at its stores. That also could have impacted traditional supermarket stocks, Yarbrough suggested.

“All of these grocery companies are also investing in curbside delivery — either buy online and pickup in the store, or do delivery — but that all comes at a cost,” he said. “You have to pay for the technology, which is an added expense. We all know that groceries are a low-margin business, and if you are paying an employee to walk around and pick the product for you and have it curbside, versus having the customer do that, that hurts margins even more.”

Traditional supermarkets may be able to boost their stocks — and earnings — by concentrating on fresh foods.

“The market is clearly going toward more fresh and prepared foods, particularly high-quality prepared foods, and that’s not Walmart’s strength,” Cerankosky said.

He cited his recent visit to a Fred Meyer store, a Kroger division in the Pacific Northwest, where he saw a vast assortment of heat-and-eat, grab-and-go, and ready-to-cook foods, along with an extensive deli department. “The economy is getting better and people have less time to shop and cook. I think they appreciate a certain level of prepared foods,” he said.

But supermarkets cannot take it for granted that just putting out a greater assortment of prepared foods will help the bottom line. 

“You still have to make money, and shrink is important. If you’re not turning the product and you’ve made the food and committed to the labor, then it becomes a big challenge,” Cerankosky said.

Supermarket stocks were largely up in today’s market, with Kroger, Supervalu, Weis Markets and Ingles Markets among those showing gains.