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2 Supermarket Stocks to Watch on Robust Industry Trends

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Players in the Zacks Retail – Supermarkets industry have been benefiting from their constant efforts to improve store and online operations. Companies are committed to improving delivery and payment options and strengthening assortments. That said, increased technological investments and high supply-chain costs threaten margins.

However, store traffic growth, online demand and efforts to boost omnichannel operations bode well for industry participants. Walmart Inc. WMT and The Kroger Co. KR are a couple of players that look well positioned on the prevalent opportunities.

About the Industry

The Zacks Retail – Supermarkets industry includes supermarket retailers that 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. 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 enhanced pickup and delivery services and are offering easy payment options.

Major Trends Shaping the Future of the Supermarkets Industry

Solid Omnichannel Efforts: Supermarket retailers have left no stone unturned to strengthen operations – both online and online. Companies have been benefiting from their focus on store improvisation, merchandise enhancement, prudent pricing strategy and efforts to replenish assortments. Also, industry players have been pushing the edge out of the envelope to bolster online operations. The increase in popularity of online shopping, particularly after the pandemic, propelled companies to constantly ramp up efforts in this arena through acquisitions, partnerships 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 and 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. Also, with digitization, several supermarket players have gained detailed insight into their operational performance, demand cycles, supply-chain issues, and delivery status. This has been improving their competitiveness in the market with higher operational productivity, product quality and lower costs.

Favorable Demand Aids: Supermarket companies benefit from favorable demand for essentials, as at-home consumption remains elevated. Per the report published by the Commerce Department on Sep 14, U.S. retail sales grew 0.6% in August after increasing 0.5% in July. August retail sales increased 1.6% from the year-ago period’s levels. The rise of retail sales indicates a favorable demand in the industry despite the presence of inflationary pressures. Solid demand for staple products, especially groceries, medicines and cleaning supplies, supported by strong dine-at-home and work-from-home practices, has driven the industry. These demand trends are likely to persist in the near term, as many Americans prefer to work and cook at home. This calls for supermarket players to continue investing in innovative offerings and merchandising to make the most of such trends.

Rising Costs Hurt Margins: The industry is dealing with margin pressure due to inflation in raw materials and other expenses, hurting profitability. This apart, companies’ constant technological investments to bolster online operations, elevated supply chain and wage expenses threaten margins and profitability. Continued price investments and other promotion activities also come at the cost of margins.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #88, which places it in the top 36% 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 outperform 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 March 2023, the industry’s consensus earnings estimate for the current fiscal year has increased 4.3%.

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 and the broader Zacks Retail – Wholesale sector in the past year.

The industry has gained 21.2% over this period compared with the S&P 500’s growth of 18.7%. Meanwhile, the broader sector has risen 11.3% in the said time frame.

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 21.73X compared with the S&P 500’s 18.52X and the sector’s 20.57X.

Over the last five years, the industry has traded as high as 24.48X and as low as 17.24X, with the median being at 20.89X.

2 Supermarket Stocks to Keep a Close Eye on

Walmart: This supermarket giant has been benefiting from its sturdy comp sales record, which in turn is driven by its constant expansion efforts and splendid e-commerce performance. Walmart is aggressively expanding in the booming online grocery space, which has long been a significant contributor to e-commerce sales. Also, the Zacks Rank #2 (Buy) company’s e-commerce business and omni-channel penetration have increased.

Walmart has significantly bolstered its delivery capabilities, as exemplified by its partnership with Salesforce, the expansion of the InHome delivery service, investments in DroneUp and the launch of the Walmart+ membership program. The Zacks Consensus Estimate for WMT’s current financial-year sales and earnings suggests 9.2% and 2.2% growth, respectively, from the year-ago reported numbers. It has a trailing four-quarter earnings surprise of 11.6%, on average. Shares of WMT have increased 24.2% in the past year.

The Kroger Co.: The company has been successfully expanding its market share through various measures like offering plant-based products, digital coupons, online order pickup, and smart shopping lists. This Zacks Rank #3 (Hold) company is focused on no-contact delivery options, low-contact pickup service and ship-to-home orders. The company has been benefiting from its “Restock Kroger” program, which involves investments in an omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization and lowering expenses.

Management targets growth opportunities beyond food, such as Health & Wellness, Kroger Personal Finance, Media, and Customer Data Insights. The Zacks Consensus Estimate for KR’s current financial-year sales and earnings suggests growth of 4.5% and 6.6%, respectively, from the year-ago reported numbers. This Cincinnati-based retailer has a trailing four-quarter earnings surprise of 6.8%, on average. Shares of KR have gained 1.6% in the past year.
Walmart Inc. (WMT): Free Stock Analysis Report

The Kroger Co. (KR): Free Stock Analysis Report

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Zacks Investment Research

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