The U.S. economy is witnessing a record high inflation coming out of the COVID-19 pandemic. The U.S. government spent quite aggressively during the pandemic, which now, as economists claim, is manifesting in high inflation.
Prolonged supply chain disruptions and rising energy prices due to the continued Russia-Ukraine war are additional key reasons behind the inflationary environment. In March, prices climbed 8.5% year-over-year, recording the highest level since 1981.
Grocery prices have jumped significantly as a result. However, given the inelastic demand for grocery items, grocery retailers have stayed afloat by passing on the rising costs to consumers. That is why today I will analyze grocery retailers Albertsons Companies, Inc. (ACI), The Kroger Co. (KR), and Walmart Inc. (WMT).
Rising Prices and Its Effect on the Grocery Retail Industry
Grocery items fall under the consumer staples industry, and they usually face a stable demand, given their indispensable nature. In other words, these items are considered to be non-cyclical and impervious to business cycles. The Consumer Staples Select Sector SPDR Fund (XLP) has gained 1.6% year-to-date and 4.4% over the past month, while the S&P 500 lost 12.4% and 8.1% over the respective periods.
Food prices are increasing as a part of the inflationary environment. The food index rose 1% in March over February and 8.8% compared to the prior 12 months. Grocery prices were higher by 7.9% year-over-year as of February 2022. Individually, how each item was affected depends upon how the supply chain for that was affected due to the pandemic and the demand for it.
The United States Department of Agriculture (USDA) expects further hikes in food prices. According to USDA’s Economic Research Service, food prices would see a 4.5%-5% increase this year, while grocery prices are expected to gain 3%-4% over the upcoming months.
Due to the inelastic demand for grocery items, retailers have been able to stay afloat by passing on the rising prices to consumers. In other words, despite increasing costs, retailers have been witnessing an almost stable demand for their products. The National Retail Federation predicts retail profits to grow between 6% to 8% this year.
Performance of Industry Leaders
One notable name in the grocery retail industry is Costco Wholesale Corporation (COST), with a $251.85 billion market capitalization. The stock has gained 14.5% over the past three months to close yesterday’s trading session at $553.76, while the S&P 500 declined 4% over the same period.
With a market capitalization of $109.66 billion, Target Corporation (TGT) is another retail giant. TGT’s stock has gained 11.7% over the past three months, outpacing the broader market.
Grocers increasingly depend on fresh food items to increase sales and are focused on offering locally-sourced products. TGT’s CEO Brian Cornell said that groceries has become a “$20 billion company” for TGT and that fresh food offering growth supports its bottom line.
Best Grocery Stocks to Buy Now
As grocery retailers enjoy decent profits despite the rise in prices, we think the following grocery stocks might experience more upsides.
Albertsons Companies, Inc. (ACI)
ACI operates as a food and drug store company in the United States. The company’s store offerings include grocery products, health and beauty care products, general merchandise, fuel, and other items. It operates under various brand names.
For the fiscal fourth quarter ended February 26, ACI’s net sales and other revenue increased 10.2% year-over-year to $17.38 billion. Adjusted net income rose 25.8% from the prior-year quarter to $436.80 million, while adjusted net income per Class A common share improved 25% from the same period a year ago to $0.75.
The consensus EPS estimate of $0.91 for the fiscal quarter ending May 2022 indicates a 2.2% year-over-year increase. Likewise, the consensus revenue estimate for the same quarter of $22.70 billion reflects a rise of 10.9% from the prior-year period. Moreover, ACI has an impressive surprise earnings history, as it has topped consensus EPS estimates in each of the trailing four quarters.
The stock has gained 72.5% over the past year and 4.1% year-to-date to close yesterday’s trading session at $31.42.
ACI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
ACI has a Growth grade of B. This is consistent with its revenue and net income growth at a 5.9% and 131.2% CAGR over the past three years. The stock has a B grade for Value, in sync with its forward non-GAAP PEG multiple of 0.90, 66.5% lower than the industry average of 2.70. In terms of its forward EV/Sales, it is trading at 0.38x, 79.7% lower than the industry average of 1.89x. ACI also has a Sentiment and Quality grade of B. In the 39-stock Grocery/Big Box Retailers industry, it is ranked #1. The industry is rated A.
Click here to see the additional POWR Ratings for ACI (Momentum and Stability).
The Kroger Co. (KR)
KR is a retailer that operates a combination of food and drug stores, multi-department stores, marketplace stores, and price-impact warehouses. The company’s offerings also include manufactured and processed food products and fuel.
KR’s sales increased 7.5% year-over-year to $33.05 billion in the fiscal fourth quarter of 2021. Adjusted net earnings attributable to KR came in at $686 million, up 8.9% from the prior-year quarter. Adjusted net earnings attributable to KR per common share improved 12.3% from the same period last year to $0.91.
Analysts expect KR’s EPS to increase 3.5% year-over-year to $3.81 in the fiscal year 2023. Likewise, Street expects revenue to rise 3.9% from the prior year to $143.31 billion for the same period. In addition, KR has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
KR’s shares have gained 52.5% over the past year and 23.1% year-to-date to close yesterday’s trading session at $55.72.
It’s no surprise that KR has an overall A rating, which translates to Strong Buy in our POWR Rating system.
KR has an A grade for Growth, in sync with its revenue, EBIT, and EBITDA growth at a 4.2%, 11.5%, and 8.1% CAGR over the past three years. The stock has a B grade for Value. This is consistent with its forward EV/Sales multiple of 0.42, 77.7% lower than the industry average of 1.89. In terms of its forward Price/Sales, it is trading at 0.29x, 77.2% lower than the industry average of 1.26x. KR also has a Quality grade of B. It is ranked #5 in the Grocery/Big Box Retailers industry.
In addition to the POWR Rating grades we’ve stated above, one can see KR ratings for Momentum, Stability, and Sentiment here.
Walmart Inc. (WMT)
WMT is a retail industry giant that engages in retail, wholesale, and other unit businesses globally. The company operates through the three broad segments of Walmart U.S.; Walmart International; and Sam’s Club.
WMT’s total revenues increased 0.5% year-over-year to $152.87 billion in the fiscal fourth quarter ended January 31. Operating income improved 7.3% from the same period last year to $5.89 billion. Adjusted EPS rose 10.1% from the prior-year quarter to $1.53.
Street EPS estimate of $6.75 for fiscal 2023 indicates a 4.5% year-over-year increase. Likewise, Street revenue estimate for the same year of $590.32 billion reflects a rise of 3.1% from the same period the prior year. Moreover, WMT has topped consensus EPS estimates in each of the trailing four quarters.
WMT’s stock has gained 12.6% over the past year to close yesterday’s trading session at $155.30. It has gained 7.3% year-to-date.
This promising outlook is reflected in WMT’s POWR Ratings. The stock has an overall A rating, equating to Strong Buy in our proprietary rating system.
WMT has a Stability grade of B, in sync with its five-year monthly beta of 0.55. The stock has a B grade for Quality, consistent with its trailing 12-month ROE, ROTC, and ROA of 16.66%, 10.76%, and 5.58%, which are 26.41%, 50.73%, and 13.65% higher than their respective industry averages of 13.18%, 7.14%, and 4.91%. WMT also has a Growth and Sentiment grade of B. It is ranked #7 in the same industry.
To see the additional POWR Rating for Value and Momentum for WMT, click here.
ACI shares were trading at $31.81 per share on Wednesday afternoon, up $0.39 (+1.24%). Year-to-date, ACI has gained 6.21%, versus a -10.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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