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3 Supermarket Stocks to Watch as Industry Rides on Solid Demand

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Vrishali Bagree
·8 min read
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Players in the Zacks Retail – Supermarkets industry are gaining on burgeoning demand amid the pandemic-led increased at-home consumption and stock hoarding. The pandemic-induced social distancing has boosted online shopping, which is also working well for supermarket players who have been constantly stepping up their e-commerce game. However, costs associated with digital fulfillment as well as COVID-19 are squeezing margins to an extent.

Nonetheless, prudent saving measures and constant efforts to enhance store and digital operations have been working in favor of Walmart Inc. (WMT), The Kroger Co. (KR) and Companhia Brasileira de Distribuicao (CBD).

About the Industry

The Zacks Retail – Supermarkets industry includes supermarket retailers, which offer products like grocery, health and beauty aids, household chemicals, electronics, stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, entertainment products, home furnishings and much more. Players in this industry operate through various formats such as supermarkets, multi-department stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs among others. Nevertheless, food retail accounts for a chunk of their business.

3 Trends Shaping the Future of the Supermarkets Industry

Pandemic-Led Demand Here to Stay: Supermarket players have been benefiting from increased demand for essentials stemming from the pandemic-induced stock piling trends. Incidentally, consumers are reducing shopping trips but going for larger basket sizes to maintain social distancing. Further, elevated stay at-home trends have given a significant boost to online shopping. Items such as toilet paper, disinfectants, masks, gloves, packaged water, infant supplies medicines, groceries and other staple products have been seeing a spike in demand — thereby boosting revenues of supermarket retailers. Certainly, the industry’s prospects are linked with consumers’ purchasing power, which regained momentum after the ease in lockdowns. The gradual reopening of the economy and measures undertaken to support households have been driving demand as well. With no effective treatment for coronavirus, the stay at-home and dine at-home trends are likely to stay.

Robust Omnichannel Efforts: Supermarket retailers have been pushing the edge out of the envelope to strengthen operations – both at stores as well as online. In fact, the pandemic-led social distancing has taken online shopping to another level – causing industry players to constantly step up their efforts in this arena, including expanding online assortments and improving delivery and payment systems. In this regard, companies have been benefiting from their same-day delivery, buy online and pick-up in store, curbside pickup as well as contactless payment options. Apart from this, supermarket retailers are focused on store improvisation, merchandise enhancement, prudent pricing strategy and efforts to replenish assortments. Certainly, such initiatives keep the industry participants well positioned for the near term – including the crucial holiday season. In fact, companies like Walmart have come up with several measures like additional hiring, relevant product to address the need of the hour as well as lucrative deals to make the most of this significant selling period.

Pressure on Margins: Companies’ constant e-commerce investments as well as compelling pricing strategy come at the cost of margins. Apart from this, companies are seeing margin pressure from elevated costs related to COVID-19. These include additional employee payments and benefits, along with costs associated with upgraded safety and sanitization to protect health of customers and team members. That said, sustained cost-containment measures are necessary to manage margins.

Zacks Industry Rank Indicates Robust Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #23, which places it in the top 9% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident about this group’s earnings growth potential. Since the beginning of June 2020, the industry’s consensus earnings estimate for the current year has jumped 10.6%.

Let’s look at the industry’s performance and current valuation.

Industry Versus Broader Market 

The Zacks Retail – Supermarkets industry has outpaced the S&P 500 composite, while it has underperformed the broader Zacks Retail – Wholesale sector over the past year.

The industry has rallied 21.1% over this period compared with the S&P 500’s growth of 18.2%. Meanwhile, the broader sector has gained 46.6% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 23.69X compared with the S&P 500’s 22.95X and the sector’s 33.31X.

Over the last five years, the industry has traded as high as 23.69X and as low as 14.08X, with the median being at 18.12X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

3 Supermarket Stocks to Keep a Close Eye on

Kroger: This grocery retailer has been making every effort to strengthen position not only with respect to products but also in terms of the way consumers prefer shopping grocery. Notably, the company’s “Restock Kroger” program involving investments in omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization, and lowering of expenses has been gaining traction. Of late, the Cincinnati-based company has been benefiting from the coronavirus-induced increased demand. Importantly, the company has seen upward estimate revisions for its fiscal 2020 bottom line over the past 30 days by 10.8%. The consensus estimate of $3.28 suggests growth of 49.1% from the year-ago reported figure. Moreover, this Zacks Rank #1 stock has an estimated long-term earnings growth rate of 6.2% and its shares have gained 8.6% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: KR

Walmart: The omnichannel retailer has been benefiting from its concerted efforts to keep pace with the evolving consumer shopping patterns. To this end, the Arkansas-based retailer’s efforts to step up its e-commerce game as well as improve store experience have been yielding well. With regard to e-commerce, Walmart has been particularly gaining from strength in online grocery, courtesy of its robust delivery services. Toward this end, the company’s recent launch of Walmart+ and Express Delivery hold solid potential. Encouragingly, Walmart has been gaining on rising demand for grocery and general merchandise items amid coronavirus-led stay-at-home trends. In fact, the elevated stay-at-home trends are largely boosting this supermarket biggie’s e-commerce sales. Notably, this Zacks Rank #2 company’s consensus mark for fiscal 2021 earnings has climbed 1.3% in the past 30 days. Moreover, the consensus mark of $5.35 indicates an 8.5% jump from the figure recorded in the same period last year. Further, Walmart has a trailing four-quarter earnings surprise of 9.5%, on average and its shares have rallied 13.5% in the past six months.

Price and Consensus: WMT

Companhia Brasileira: The Brazil-based company operates through Food Retail as well as Cash and Carry segments. Companhia Brasileira has long been gaining from its focus on utilizing its multi-network and multi-format existence in order to offer consumers innovative services and products. Apart from this, the company is on track with digital transformation, which is best highlighted by its James Delivery and Cheftime platforms, among others. Notably, the coronavirus-led stock hoarding has been leading to greater volumes at Companhia Brasileira, with increased social distancing leading to a stronger digital business. To this end, the company is likely to benefit from measures like elevating inventory levels, additional hiring, undertaking safety measures, enhancing digital services and more to cater to the rising demand for essentials amid the pandemic. The Zacks Consensus Estimate for its 2020 bottom line has remained stable in the past seven days at 78 cents per share, which suggests a 77.3% increase from the year-ago period’s reported figure. Encouragingly, this operator of supermarkets, hypermarkets and department stores has an estimated long-term earnings growth rate of 21.3%. Shares of the Zacks Rank #3 company have slipped 1.9% in the past six months.

Price and Consensus: CBD

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