Players in the Zacks Retail – Supermarkets industry have been operating in a dynamic operational landscape due to inflation and other economic conditions. These factors have affected consumers’ shopping patterns, causing them to opt for budget-friendly options. The persistence of these headwinds poses concerns for supermarket players’ revenues.
However, companies in the industry are finding advantages in their ongoing initiatives to enhance both physical store and online operations. Seamless delivery and payment options, as well as strong omnichannel capabilities, have proven to be effective for supermarket giants like Walmart Inc. WMT and The Kroger Co. KR.
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 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 Supermarket Industry
Dynamic Economic Landscape: Companies in the supermarket space have been navigating a challenging operational landscape marked by inflation and prevailing economic conditions, especially in the context of higher interest rates. These factors predominantly have been affecting budget-conscious consumers, leading them to opt for smaller pack sizes and prioritize lower shelf prices. As a result, consumers are choosing smaller shopping baskets and gravitating toward more cost-effective items to manage their budgets effectively. Despite moderation in inflation, the unpredictable economic landscape and its influence on consumer spending patterns continue to pose challenges to supermarket companies’ revenues.
Escalated Costs Erode Margins: Companies have been facing escalating operational expenses in their efforts to step up performance. Factors such as the costs associated with store renovations and increased wages are putting pressure on the profit margins of companies. The ongoing technological investments made by supermarket entities to strengthen their online operations, along with other promotional activities, further contribute to the strain on profit margins.
Strong Omnichannel Efforts: Supermarket retailers have spared no effort in fortifying their operations both online and offline. Companies have been benefiting from their focus on store improvisation, merchandise enhancement, prudent pricing strategy and efforts to replenish assortments. Moreover, industry players are pushing the boundaries to enhance their online presence. The surge in online shopping has prompted companies to consistently intensify their endeavors in this arena through acquisitions, partnerships and the enhancement of 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 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.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #184, which places it in the bottom 27% 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 dreary 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.
Let’s look at the industry’s performance and current valuation.
Industry Versus Broader Market
The Zacks Retail – Supermarkets industry has underperformed the S&P 500 and the broader Zacks Retail – Wholesale sector in the past year.
The industry has risen 8% over this period compared with the S&P 500’s growth of 25.6%. Meanwhile, the broader sector has risen 26.7% 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 staple stocks, the industry is currently trading at 20.61X compared with the S&P 500’s 19.98X and the sector’s 22.64X.
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 21.08X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
2 Supermarket Stocks to Keep a Close Eye On
Walmart: The retail behemoth has been capitalizing on its robust comp sales performance, propelled by its proactive store expansion initiatives and impressive e-commerce achievements. Walmart is actively engaged in augmenting its product offerings and has a dedicated focus on renovating its stores, incorporating advanced in-store and digital innovations. The company has taken concrete steps to extend its presence in the thriving online grocery sector, a consistent driver of its e-commerce sales.
This Zacks Rank #3 (Hold) company 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 fiscal year earnings per share (EPS) has risen by a penny to $6.44 in the past 60 days. Shares of Walmart have increased 8.7% in the past year.
Price and Consensus: WMT
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The Kroger Co.: The company’s well-defined customer segmentation strategy, emphasis on value and focus on its ‘Our Brands’ portfolio bode well. Kroger’s strategic initiatives, including “Leading with Fresh” and “Accelerating with Digital”, are also noteworthy. KR’s digital business has become a key driver, powered by strategic initiatives like the Delivery Now program, Boost membership program and the expansion of customer fulfillment centers.
Apart from this, this Zacks Rank #3 company has been benefiting from its “Restock Kroger” program, which involves investments in an omnichannel platform, identifying margin-rich alternative profit streams, merchandise optimization and lowering expenses. The Zacks Consensus Estimate for Kroger’s current fiscal year earnings EPS has risen by 1.1% to $4.57 in the past 30 days. This Cincinnati-based retailer’s shares have risen 3.8% in the past year.
Price and Consensus: KR
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Walmart Inc. (WMT) : Free Stock Analysis Report
The Kroger Co. (KR) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
