2 supermarket stocks to watch based on robust industry trends

Players in the Zacks Retail – supermarkets The industry has benefited from their continued efforts to improve retail and online operations. Companies are committed to improving delivery and payment options and strengthening ranges. That said, increased technology investments and high supply chain costs threaten margins.

However, growth in store traffic, online demand and efforts to drive omnichannel activities are promising for industry participants. Walmart Inc. WMT and The Kroger Co. KR are a few players who appear well positioned for the prevailing odds.

About the industry

The Zacks Retail – Supermarkets industry includes supermarket retailers offering groceries, health and beauty aids, household chemicals, electronics, stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, entertainment products, home furnishings and more. Players in this sector operate through various formats such as supermarkets, multi-store stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs. Food retailing accounts for part of their turnover. The sector has undergone significant transformation over the years, with e-commerce playing a strong role. Given consumers’ increasing preference for online shopping, industry participants have improved pickup and delivery services and offered easy payment options.

Important trends shaping the future of the supermarket sector

Solid omnichannel efforts: Supermarket retailers have been doing everything they can to strengthen their operations – both online and online. Companies have benefited from their focus on store improvisation, product improvement, sensible pricing strategy and efforts to replenish assortments. Industry players have also pushed their boundaries to strengthen online activities. The increasing popularity of online shopping, especially after the pandemic, has prompted companies to continuously ramp up their efforts in this area through acquisitions, partnerships, and improved delivery and payment systems. In this regard, businesses have taken advantage of their same-day delivery, buy online and pick up in store, curbside pickup and contactless payment options. Companies’ concerted efforts to unify store and online operations to provide customers with a solid omnichannel experience leave them well-positioned for growth. Digitalization has enabled several supermarket players to gain detailed insights into their operational performance, demand cycles, supply chain issues and delivery status. This has improved their competitive position in the market with higher operational productivity, product quality and lower costs.

Favorable question assistance: Supermarket companies are benefiting from favorable demand for basic necessities as consumption at home remains high. According to the report released by the Commerce Department on September 14, US retail sales grew 0.6% in August, after rising 0.5% in July. Retail sales in August rose 1.6% compared to the same period last year. The increase in retail sales signals favorable demand in the sector, despite the presence of inflationary pressures. Solid demand for staples, especially groceries, medicines and cleaning products, supported by strong dine-in and work-from-home practices, has boosted the sector. These demand trends are likely to persist in the near term as many Americans prefer to work and cook from home. This requires supermarket players to continue investing in innovative offers and merchandising to make the most of such trends.

Rising costs hurt margins: The industry is facing margin pressure due to inflation of raw materials and other expenses, which is hurting profitability. Apart from that, companies’ continued technology investments to strengthen online operations, increased supply chain and labor costs threaten margins and profitability. Continuous price investments and other promotional activities are also at the expense of margins.

Zacks Industry Rank indicates good prospects

The Zacks Retail – Grocery industry is housed within the broader Zacks Retail – Wholesale sector. The sector currently has a Zacks Industry Rank #88, putting it in the top 36% of over 250 Zacks industries.

That of the group Zacks Industry Ranking, which is essentially the average of the Zacks Rank of all member stocks, indicates a strong near-term outlook. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Looking at the overall earnings estimate revisions, it appears that analysts are gradually becoming more confident in this group’s earnings. growth potential. Since the beginning of March 2023, the consensus estimate of corporate profits for the current fiscal year has increased by 4.3%.

Let’s take a look at the sector’s performance and current valuation.

Industry versus broader market

The Zacks Retail – Grocery sector has outperformed the S&P 500 and the broader Zacks Retail – Wholesale sector over the past year.

The sector is up 21.2% during this period, compared to the S&P 500’s growth of 18.7%. Meanwhile, the broader sector is up 11.3% in the said time frame.

One year price performance

Current valuation of the sector

Based on the trailing-twelve-month price-to-earnings (P/E) ratio, which is commonly used to value consumer staples stocks, the sector is currently trading at 21.73x, compared to the S&P 500’s 18.52x and the 20 .57x of the sector.

Over the past five years, the sector has traded at a high of 24.48x and a low of 17.24x, with the median being 20.89x, as the chart below shows.

Price-to-earnings ratio (last 5 years) versus S&P 500

Price/earnings ratio (last 5 years) versus sector

2 supermarket stocks to keep an eye on

Walmart: This supermarket giant has benefited from its solid sales record, which in turn is driven by its continued expansion efforts and excellent e-commerce performance. Walmart is aggressively expanding into the booming online grocery space, which has long been a major contributor to e-commerce sales. The Zacks Rank #2 (Buy) company’s e-commerce business and omnichannel penetration have also increased. You can see You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Walmart has significantly strengthened its delivery capabilities, as evidenced by its partnership with Salesforce, the expansion of its InHome delivery service, investments in DroneUp and the launch of the Walmart+ membership program. The Zacks Consensus Estimate for WMT’s current fiscal year revenue and earnings suggests growth of 9.2% and 2.2%, respectively, from the figures reported a year ago. It has a four-quarter earnings surprise of 11.6% on average. WMT shares are up 24.2% in the past year.

Price and consensus: WMT

The Kroger Co.: The company has successfully expanded its market share through various measures such as offering plant-based products, digital coupons, online order pickup and smart shopping lists. This Zacks Rank #3 (Hold) company focuses on contactless delivery options, low-contact pickup, and ship-to-home orders. The company has benefited from its “Restock Kroger” program, which includes investing in an omni-channel platform, identifying high-margin alternative profit streams, merchandise optimization and reducing costs.

Management focuses on growth opportunities beyond food, such as Health & Wellness, Kroger Personal Finance, Media and Customer Data Insights. The Zacks Consensus Estimate for KR’s current fiscal year revenue and earnings suggests growth of 4.5% and 6.6%, respectively, from the figures reported a year ago. This Cincinnati-based retailer has an average fourth-quarter earnings surprise of 6.8%. KR shares are up 1.6% in the past year.

Price and consensus: KR

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