Players in the Zacks Retail – Supermarkets industry are gaining on their constant efforts to improve store and online operations. Companies have been stepping up their delivery and payment options alongside strengthening assortments. That said, these investments and increased supply-chain costs remain a threat to margins.
Nevertheless, solid 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-placed.
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
Strong Omnichannel Efforts: Supermarket companies have been exploring every nook and cranny to solidify store and online operations. 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. Companies have been benefiting from their same-day delivery, buy online and pick-up in-store, curbside pickup as well as contactless payment options. Companies’ concerted efforts to unite store and online operations to offer customers a solid omnichannel experience certainly keep them well-placed for growth.
Favorable Demand to Stay: Supermarket players have been gaining from favorable 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 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 Strong Prospects
The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #9, which places it in the top 4% 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 August 2022, the industry’s consensus earnings estimate for the current fiscal has increased 2.4%.
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 14.9% over this period compared with the S&P 500’s growth of 1.9%. Meanwhile, the broader sector has risen 3.9% 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 20.13X compared with the S&P 500’s 18.01X and the sector’s 22.28X.
Over the last five years, the industry has traded as high as 24.48X and as low as 16.23X, with the median being at 20.5X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
3 Supermarket Stocks to Keep a Close Eye on
The Kroger Co.: 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. This Zacks Rank #2 (Buy) company 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.
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 60 days by 1.7%. This Cincinnati-based retailer has an estimated long-term earnings growth rate of 6.1% as well as a trailing four-quarter earnings surprise of 13.4%, on average. Shares of KR have dipped 2.2% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: KR
Walmart: This Zacks Rank #3 (Hold) company has been benefiting from its strong omnichannel efforts and last-mile delivery capabilities. Walmart’s e-commerce business and omni-channel penetration have been increasing all the more amid the pandemic-led social distancing. The supermarket giant 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.
Walmart has been taking several e-commerce initiatives, including buyouts, alliances, and improved delivery and payment systems. Additionally, it 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 current fiscal-year earnings has gone up by 2 cents to $6.08 per share in the past 60 days. Shares of WMT have increased 12.5% in the past six months.
Price and Consensus: WMT
Companhia Brasileira: This Zacks Rank #3 company is gaining on its digital transformation efforts in the face of consumers’ increased preference for online shopping. Certainly, CBD’s 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 2023 bottom line has declined from 34 cents to 26 cents over the past 30 days.
Shares of this Brazilian retailer of food, clothing, home appliances, electronics, and other products have rallied 35% in the past six months.
Price and Consensus: CBD
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