Growth prospects of the grocery industry are anticipated to be bolstered by persistent consumer spending. Given the industry’s recession-resistant nature, let us discuss why Costco Wholesale Corporation (COST), Dollarama Inc. (DLMAF), The Kroger Co. (KR), and Ingles Markets, Incorporated (IMKTA) could be worth watching now.
Let’s discuss what’s shaping the grocery industry’s prospects before delving deeper into the fundamentals of the stocks mentioned above.
The grocery industry belongs to the broader consumer staples sector and tends to be a good hedge against market volatility due to stable product demand. Grocery price increases in the United States slowed down in August to just 0.2%, lower than July’s 0.3%, bringing some inflation relief to consumers.
Moreover, using Artificial Intelligence (AI), Machine Learning (ML), and other technologies, grocery retailers are creating faster, more personalized, and better shopping experiences for customers, simultaneously improving their retail operations and optimizing business processes.
The growth of e-commerce and the widespread return of store-shopping experiences are expected to influence the grocery sector’s performance this year and beyond. According to SkyQuest, the global online grocery market is expected to reach $2.18 trillion by 2030, growing at a CAGR of 25.3%.
Given this backdrop, let’s discuss the fundamentals of the four stocks listed above from the Grocery/Big Box Retailers industry, starting with the fourth stock.
Stock #4: Costco Wholesale Corporation (COST)
COST operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company offers sundries, dry groceries, candies, coolers, freezers, liquor, and tobacco and deli products; appliances, electronics, health and beauty aids, hardware, etc.
In terms of the trailing-12-month Return on Common Equity (ROCE), COST’s 27.54% is 144.2% higher than the 11.28% industry average. Likewise, its 15.49% trailing-12-month Return on Total Capital (ROTC) is 138.3% higher than the industry average of 6.50%. Furthermore, the stock’s 3.64x trailing-12-month asset turnover ratio is 300.2% higher than the industry average of 0.91x.
COST’s total revenue for the fourth quarter (ended September 3, 2023) increased 9.5% year-over-year to $78.94 billion. The company’s operating income and net income attributable to COST rose 11.4% and 15.6% from the prior-year period to $2.78 billion and $2.16 billion, respectively. Its EPS came in at $4.86, representing an improvement of 15.7% year-over-year.
For the fiscal first quarter ending November 2023, Street expects COST’s EPS and revenue to increase 10.2% and 6.3% year-over-year to $3.42 and $57.86 billion, respectively.
The stock has gained 25.3% year-to-date and 14.9% over the past six months to close the last trading session at $571.80.
COST’s prospects are reflected in its POWR Ratings. It has a B grade for Stability and Sentiment. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #21 in the A-rated 39-stock Grocery/Big Box Retailers industry. In addition to the POWR Rating grades I’ve just highlighted, you can see COST’s ratings for Growth, Value, Momentum, and Quality here.
Stock #3: Dollarama Inc. (DLMAF)
Headquartered in Mount Royal, Canada, DLMAF is a dollar store chain, offering a variety of products like general merchandise, consumable and seasonal products in physical stores and online.
The stock’s trailing-12-month EBIT margin and net income margin of 23.13% and 16.12% are 214.2% and 266.7% higher than the industry averages of 7.36% and 4.40%, respectively. Its trailing-12-month levered FCF margin of 17.78% is 248.8% higher than the 5.10% industry average.
For the fiscal second quarter that ended July 30, 2023, DLMAF’s sales increased 19.6% year-over-year to C$1.46 billion ($1.06 billion), while its gross profit increased 20.5% from the prior-year period to C$638.86 million ($465.43 million).
Its operating income improved 27.6% from the year-ago value to C$366.76 million ($267.20 million). The company’s net earnings and net earnings per common share came in at C$245.76 million ($179.05 million) and C$0.86, representing increases of 27% and 30.3% from the prior-year quarter, respectively.
Street expects DLMAF’s revenue to increase 15.7% year-over-year in the current quarter (ending October 2023) to $1.09 billion. For the current fiscal year (ending January 2024), its revenue is projected to reach $4.33 billion, indicating an increase of 16.1% from the prior year.
The stock has gained 17.6% year-to-date and 12.6% over the past year to close the last trading session at $68.95.
DLMAF’s POWR Ratings reflect this robust outlook. It has an overall rating of B, which translates to Buy in our proprietary rating system. DLMAF has an A grade for Stability and Quality and B for Growth. Within the same industry, it is ranked #19.
Beyond what we stated above, we also have DLMAF’s ratings for Value, Momentum, and Sentiment. Get all DLMAF ratings here.
Stock #2: The Kroger Co. (KR)
KR is a food retailer that owns and operates combination food and drug stores, supermarkets, multi-department stores, and fulfillment centers. It sells its products under seven brand names: Private Selection, The Kroger, Big K, Check This Out, Heritage Farm, and Smart Way.
KR’s trailing-12-month ROCE and ROTC of 16.35% and 9.54% are 45% and 46.8% higher than the respective industry averages of 11.28% and 6.50%. Its trailing-12-month asset turnover ratio of 2.99x is 229.1% higher than the 0.91x industry average.
For the second quarter of 2023, adjusted net earnings attributable to KR increased 5.7% from the previous year's values to $699 million. Its adjusted net earnings per common share came in at $0.96, up 6.7% year-over-year. Its sales for the quarter came in at $33.85 billion.
The consensus EPS estimate of $4.53 for the current fiscal year (ending January 2024) represents a 7.2% improvement year-over-year. The consensus revenue estimate of $150.08 billion for the current year indicates a 1.2% increase from the same period last year. The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
The stock gained 1.5% intraday to close the last trading session at $44.94.
KR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has a B grade for Value and Quality. KR is ranked #15 among 39 stocks in the same industry. To see the other ratings of KR for Growth, Momentum, Stability, and Sentiment, click here.
Stock #1: Ingles Markets, Incorporated (IMKTA)
IMKTA operates a chain of supermarkets that offers food products, including grocery, meat, and dairy products, produce, frozen foods, and other perishables, and non-food products, including fuel centers, pharmacies, health and beauty care products, general merchandise, and private label items.
IMKTA’s trailing-12-month asset turnover ratio of 2.49x is 174% higher than the industry average of 0.91x. Also, its trailing-12-month ROCE and ROTC of 17.59%, 10.37%, and 9.49% are 56% and 59.6% higher than the industry averages of 11.28% and 6.50%, respectively.
For the fiscal third quarter that ended June 24, 2023, IMKTA’s net sales stood at $1.43 billion, while its gross profit amounted to $338.10 million. Its income from operations came in at $67.31 million.
Its net income stood at $48.26 million, while its earnings per common share of class A and B stock stood at $2.54 and $2.36, respectively. As of June 24, 2023, IMKTA’s cash and cash equivalents stood at $280.75 million, compared to $267.20 million as of September 24, 2022.
The company’s EPS is expected to increase by 14.5% per annum over the next five years. IMKTA’s shares have gained 5.1% over the past five days to close the last trading session at $79.42.
IMKTA’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
IMKTA also has an A grade for Value and a B for Stability and Quality. It is ranked #9 within the same industry.
Click here for the additional POWR Ratings for Growth, Momentum, and Sentiment for IMKTA.
What To Do Next?
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COST shares were trading at $566.61 per share on Thursday afternoon, down $5.19 (-0.91%). Year-to-date, COST has gained 24.83%, versus a 11.76% 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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