SUPERMARKET STOCKS ALIVE AND KICKING, ANALYSTS SAY

ELLIOT ZWIEBACH

Supermarket industry stocks came alive in the first half of 1996, and financial analysts expect strong results for the balance of the year.

Even with the downward movement of the stock market over the last couple of weeks, analysts said the defensive nature of supermarket stocks will make them potentially more attractive to investors in a declining market. The SN Composite Index, which tracks stock prices of 49 companies, including retailers and wholesalers, rose 39.9% during the half. In contrast, the Dow Jones average for all stocks during the comparable period rose 11.4% and the Standard & Poor's 500 rose 9.7%. The average price of the top 10 publicly traded companies on SN's list rose 17.5%.

Analysts said the strong food industry showing reflects factors including better financial results and improved efficiency efforts. Of the 49 companies in SN's composite, 32 showed increases in their stock price, led by a 140% gain from Eagle Food Centers, Milan, Ill.; 16 experienced price declines, led by a 43.3% drop in the price of Penn Traffic Co., Syracuse, N.Y.; and the price for one company -- Supervalu, Minneapolis -- was unchanged. The industry's exceptional stock performers included perennial earnings over-achievers, such as Kroger Co., Safeway and Vons Cos. "plus several more chains that exhibited more volatile financial results in the past, like American Stores Co., A&P and Food Lion, which have begun to show improvements," said Ed Comeau, an analyst at Donaldson Lufkin & Jenrette, New York.

"While some problematic companies remain, the industry as a whole is doing quite well," Comeau explained. "And investors view the food industry more positively because they see a better-managed industry emerging, as demonstrated by its strong earnings results." Investors regard food stocks as a good hedge against inflation, Comeau noted. "And while I doubt we will see much food inflation during the balance of the year, investors looking for a safety net see supermarket stocks as a good place to be," he said.

The upswing in food-stock investments was propelled "by the industry's focus on cost controls, productivity, Efficient Consumer Response initiatives and category management, rather than battles over market share, double and triple couponing and price promotions," said Jonathan Ziegler, a San Francisco-based analyst with Salomon Bros., New York. "Rather than relying on such promotional activities, the industry generally let prices creep up." Ziegler added that he expects investors to continue to be drawn to food stocks as home-meal replacement programs and the accompanying shift to convenience and value-added foods increase sales and margins. According to Gary Giblen, managing director at Smith Barney, New York, the industry's stock performance improved "because all the stars are in alignment, with the major turnaround success at Safeway prompting investors to look for other potential turnarounds; with real same-store sales growth and room for store expansion in many marketing areas; and with private label driving margins and supermarkets in a better position to bargain on brands." Investor interest was also spurred by the pending acquisition of Stop & Shop Cos., Quincy, Mass., by Ahold, Zaandam, the Netherlands, "which got people excited about the possibility of takeovers of more medium-sized chains," Giblen added. Though Giblen said he doesn't think such takeovers are likely, he noted that such expectations by some investors fueled the high stock activity in companies like Foodarama Supermarkets, Freehold, N.J., whose stock price rose 80%, and Western Beef, Flushing, N.Y., whose price was up 54.7%. Chuck Cerankosky, an analyst with Hancock Institutional Equity Services, Cleveland, said investors were attracted to the industry's stocks during the half "because good store expansion programs and effective cost controls resulted in mounting earnings expectations, which is what investors like to see."

Investors concerned with high interest rates moved away from cyclical stocks like paper and chemicals and put their money in supermarket stocks "that can maintain growth despite high interest rates," Cerankosky said.

High-yield stocks tended to perform below those of less leveraged companies, Howard Goldberg, a high-yield analyst with Smith Barney, New York, told SN. "Companies struggling with high debt levels or an inability to invest in their store base have not had the same success as larger, less leveraged companies -- with the notable exception of Eagle."

The 140% increase in Eagle's stock price, Goldberg said, was due to two factors: the mid-1995 hiring of Bob Kelly as president and chief executive officer and the chain's ability to secure a new $40 million credit facility with better covenants.

"Kelly clearly has initiated a dramatic turnaround at Eagle in a relatively short time with his no-nonsense, operations-oriented approach, and he has restored confidence among employees at store level as well as investors, who saw a stock price of $20 per share several years ago fall below $1 at the end of 1994," Goldberg noted. "The fact that the price is now around $5 per share is no mean feat." Other companies that saw their stock prices rise during the first half of the year included the following, according to analysts: · Whole Foods Co., Austin, Texas, up 91% due to improvements in store productivity. "The company has had very strong sales per store, and investors like to see such improvements because they increase the company's margin structure and enable Whole Foods to absorb the costs of an aggressive store opening and relocation program," Cerankosky said. With Whole Foods' pending acquisition of Fresh Fields, Rockville, Md., the natural foods supermarket operator is likely to achieve economies of scale in purchasing and advertising and additional increases in sales per store as it converts the Fresh Fields units, "which are farther back on the growth curve," Cerankosky said. · American Stores, Salt Lake City, up 52.3% off a low base due to improved operating results. Giblen said investors looking for a turnaround similar to that of Safeway, Pleasanton, Calif., were drawn to American by strong sales and earnings results. According to Comeau, American's stock price took a hit in late 1995 when the company announced that benefits from its Delta Project were unlikely until 1997, a year later than had been expected. However, with strong first-half sales and earnings and the fact that 1997 is drawing closer, the chain's stock has rebounded, Comeau noted. American's operating divisions are all showing improvements, Ziegler said. Acme Markets, Malvern, Pa., has upgraded its stores and boosted same-store results. Jewel Food Stores, Melrose Park, Ill., introduced a successful frequent-shopper program. Lucky Stores benefited from changes in ownership in southern California and from distributing a promotional coupon book in northern California that allowed it to gain some share at Safeway's expense. In addition, American has been driving costs out of the system with its consolidation in Salt Lake City, and the incipient centralized-buying program launched late in the half is likely to benefit cost structures further, Ziegler said. · Riser Foods, Bedford Heights, Ohio, up 48.8% due to the success of its ongoing turnaround. Riser's efforts to improve its store formats and systems "finally has materialized in the last year," Comeau said.

According to Cerankosky, "Riser continues to do better than expected in profits and sales, with particularly strong growth coming from the wholesale side, where the company's prospecting work and long-term efforts to build relationships is paying off in an area of the country where wholesale competition is somewhat limited."

Stop & Shop Cos., Quincy, Mass., up 44.3% due primarily to its pending acquisition by Ahold.

A&P, Montvale, N.J., up 42.9% due to solving its problems in its Canadian division and an aggressive new-store expansion program. "The company appears to have resolved its problems in Canada, which has been bleeding badly, by planning to reposition its stores there under fewer banners," Comeau said. "In addition, the chain's new-store program is now in full swing, which has helped stop the stock's free-fall of the last few years." Food Lion, Salisbury, N.C., up 36.3% due to its ability to overcome perceived shortcomings. "Investors lost interest after a negative TV report in 1993, and the stock pretty much washed out," Ziegler said. "But Food Lion has delivered the goods with very dynamic results in back-to-back quarters," he added, with same-store sales up 5.2% in the first quarter and 6% in the second after declines in 1995. Ziegler attributed the turnaround to a move to larger stores with expanded perishables departments, greater use of category management to improve merchandising, a stronger emphasis on private label and 24-hour operation at some locations. Comeau called Food Lion's sales recovery "amazing," noting that the company has redesigned its stores to appeal more to mainstream shoppers rather than consumers lured strictly by price.

Stocks that showed declined prices in the first half included the following: Penn Traffic Co., down 43.3% due to ongoing competitive pressures. "The company has been performing well below prior levels, with negative same-store sales," Goldberg said. "In 1995, the problem was severe competition in upstate New York and northern Pennsylvania from aggressive promotions by Tops and Wegmans, which forced Penn Traffic to offer triple coupons.

"Many analysts had thought things would improve in 1996. But instead there seems to be no letup in competition, and the company has been unable to reposition its business with better perishables departments and better store service as it had hoped." As a result, many investors are taking a wait-and-see attitude toward Penn Traffic and its stock, Goldberg noted. Fleming Cos., Oklahoma City, down 30.3% due to a reduction in dividends and a slowdown in the rollout of its new pricing program, analysts said.

"A lot of institutional investors owned Fleming stock because of its dividend yield of approximately 4.5%, but they were required to sell it when the dividend was cut by about 95% [after a judgment against the company in a Texas lawsuit, which has recently been ordered to be retried]," Giblen said.

Another analyst told SN, "Fleming is still struggling to restructure itself to be competitive. The problem is, many of its retail customers have found it hard to understand and absorb the new pricing structure, which unbundles costs." · Super Food Services, Miamisburg, Ohio, down 26.9% due to prior over-valuation of the stock, Giblen said. "The wholesaler has not been able to find ways to achieve growth, which has prompted many investors to sell their holdings," he added. · Carr Gottstein Foods Co., Anchorage, Alaska, down 24.4% due to a leveraged recapitalization that involved a buyback of 50% of the company's shares and a one-time dividend payment that reduced the value of the remaining shares, analysts explained. · Grand Union Co., Wayne, N.J., down 19.3% because of an inability to generate sufficient cash flow to fund new capital projects.

"The company said last November that it was not meeting its reorganization forecasts and that early investor disappointment was compounded by the announcement that it was seeking a financial partner to provide $75 million to $100 million in new equity," Goldberg said. "Grand Union has already demonstrated that it can produce better returns if it can create enough funds to invest in its store base, and it has determined that it needs to get the money from outside because its post-bankruptcy debt is higher than anticipated, which makes it difficult to generate sufficient cash flow."