Players in the Zacks Retail – Supermarkets industry are benefiting from their continued efforts to enhance store and online operations. Companies have been committed to improving delivery and payment options alongside strengthening assortments. These investments, high COVID-related costs and supply-chain costs however come at the cost of margins.
Nonetheless, improving store traffic and online demand, along with robust efforts to bolster omnichannel operations keep Walmart Inc. WMT, The Kroger Co. KR and Companhia Brasileira de Distribuicao CBD well-positioned.
About the Industry
The Zacks Retail – Supermarkets industry includes supermarket retailers, which offer 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. Nevertheless, food retail accounts for a chunk of their business. The industry has undergone a significant transformation over the years, with e-commerce playing a strong role. Given consumers’ rising preference for online shopping, industry participants have been enhancing pickup and delivery services as well as offering easy payment options.
3 Trends Shaping the Future of the Supermarkets Industry
Solid Omnichannel Efforts: Supermarket retailers have been going all the way to strengthen operations – both stores and online. To this end, they have been focused on store improvisation, merchandise enhancement, prudent pricing strategy and efforts to replenish assortments. Additionally, companies have been pushing the edge out of the envelope to bolster online operations. In fact, pandemic-led social distancing has taken online shopping to another level – causing industry players to constantly step up their efforts in this arena through meaningful buyouts, alliances, and improved 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. Despite improvement in store traffic with things getting back to normal and people stepping out, online shopping remains popular. Companies’ concerted efforts to unite store and online operations to offer customers a solid omnichannel experience certainly keep them well placed for growth.
Spike in Demand to Stay: Supermarket companies have been benefitting from high demand (especially online) for essentials due to the pandemic-induced elevated at-home consumption. Incidentally, higher dine at-home and work from home practices have boosted demand for staple products, especially groceries, cleaning supplies, and medicines. Although demand has moderated from the initial spike, it remains higher than the pre-pandemic levels. In fact, even with things opening up and curbs being lifted, the pent-up demand trend is likely to stay in the near term, as a number of Americans still prefer to work and cook at home. This indeed calls for supermarket players to continue making investments toward innovative offerings and merchandising to make the most of such trends.
Pressure on Margins: Supermarket players are facing margin pressure owing to elevated COVID-related costs. These include additional employee payments and benefits along with costs associated with upgraded safety and sanitization to protect the health of customers and team members. Apart from this, companies’ constant technological investments to bolster online operations, elevated supply-chain and wage expenses pose a threat to margins. Continued price investments and other promotion activities also come at the cost of margins.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #28, which places it in the top 11% 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 bright 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. 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 November 2021, the industry’s consensus earnings estimate for 2022 has increased 4.4%.
Let’s look at the industry’s performance and current valuation.
Industry Versus Broader Market
The Zacks Retail – Supermarkets industry has outperformed the S&P 500 as well as the broader Zacks Retail – Wholesale sector over the past year.
The industry has gained 12.2% over this period compared with the S&P 500’s growth of 5.1%. Meanwhile, the broader sector has declined 25.5% 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 19.92X compared with the S&P 500’s 18.43X and the sector’s 21.27X.
Over the last five years, the industry has traded as high as 24.48X and as low as 16.15X, with the median being at 20.21X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
3 Supermarket Stocks to Keep a Close Eye on
The Kroger Co.: The company’s digital business remains one of its key growth drivers. The Kroger Co. has been focusing on a no-contact delivery option, low-contact pick-up service and ship-to-home orders. Apart from this, the company’s “Restock Kroger” program involving investments in the omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization, and lowering of expenses has been gaining traction. A dominant position among the nation’s largest grocery retailers enables The Kroger Co. to boost market share with the expansion of plant-based products, digital coupons, order online pick up in-store and smart shopping lists.
Further, the company’s Customer 1st strategy enriches consumers’ shopping experience and convinces them to return to stores. KR has seen upward estimate revisions for its current fiscal year’s bottom line over the past 30 days by 6.7%. This Cincinnati-based retailer has an estimated long-term earnings growth rate of 9.9% as well as a trailing four-quarter earnings surprise of 18%, on average. This Zacks Rank #1 (Strong Buy) stock has surged 37.3% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: KR
Companhia Brasileira: This Zacks Rank #2 (Buy) company is gaining on its digital transformation efforts in the face of consumers’ increased preference for online shopping. Certainly, its delivery models, including same-day delivery — Express and Click & Collect, Traditional or next-day delivery, and Last Mile or next-hour delivery — James Delivery and Open Platform, have been working well. Apart from this, Companhia Brasileira’s focus on store expansion is noteworthy. The Zacks Consensus Estimate for its current fiscal-year bottom line has risen considerably over the past 30 days.
Notably, this Brazilian retailer of food, clothing, home appliances, electronics, and other products has an estimated long-term earnings growth rate of 31.9%. Shares of CBD have declined 13.5% in the past six months.
Price and Consensus: CBD
Walmart: The supermarket giant has been benefiting from its robust omnichannel efforts and last-mile delivery capabilities. With more customers and members returning to stores and clubs, demand seems to be strong. Walmart has been gaining from its sturdy comp sales record, which in turn is driven by its constant expansion efforts and splendid e-commerce performance. The company has been focused on store remodeling in an attempt to upgrade them with advanced in-store and digital innovations.
From fiscal 2021 beginning till fiscal 2022 end, the company’s digital sales, as a percentage of sales, increased from 6% to 13%. Walmart has been taking several e-commerce initiatives, including buyouts, alliances, and improved delivery and payment systems. Additionally, Walmart is making aggressive efforts to expand in the booming online grocery space, which has long been a major contributor to e-commerce sales. The consensus mark for this omnichannel retailer’s current fiscal year earnings has jumped 0.6% in the past 30 days. This Zacks Rank #3 (Hold) stock has climbed 0.8% in the past six months.
Price and Consensus: WMT
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