Why Supermarket Stocks Are Getting Squeezed

 Resize text         Printer-friendly version of this article Printer-friendly version of this article

Orange juice isn't the only thing at your supermarket that's been squeezed.

Rising food prices mean grocery store chains must absorb extra costs on items like meat, seafood, and produce, or they try to pass them along to customers. But many of those consumers are unemployed or have less money to spend, even on essentials. For now, the big chains are mostly choosing to absorb. As a result, profits are falling, and so are their stocks, making them one of the few dim lights in the market in 2011.

On Tuesday, Supervalu was the first of the grocers to report quarterly results, and the numbers for its fiscal third quarter were ominous: A loss of $202 million, or 95 cents a share, compared with a profit of $109 million, or 51 cents, in the same period a year earlier. The company, which operates Albertsons, Jewel-Osco, Acme and other chains, also cut its forecast for the year.

"This is going to be a challenging year going forward to manage inflation," Supervalu CEO Craig Herkert told analysts Tuesday. "It's just a fact and we believe these inflationary measures are going to impact consumers."

The result: "Investing in (grocers) now is certainly not for the faint of heart," says Philip Gorham, an analyst at Morningstar.

The pressures supermarkets are dealing with are felt elsewhere, too. Soaring commodity prices help energy and agriculture companies that produce raw materials. But there are plenty of losers from the commodity boom stuck trying to pass on higher costs to customers whose wages are not rising as quickly. Evidence of that came in the government's inflation report on Friday. The Consumer Price Index rose 0.5 percent in December, the largest increase in 18 months. Most of that was due to higher gasoline prices. Food prices increased just 0.1 percent, suggesting grocers still aren't passing along higher costs on most items.

Forty million Americans now rely on foods stamps, up 50 percent from four years ago, and the average price of gas now costs 12 percent more than it did at this time last year. That's one reason why middle and lower income consumers are increasingly going to supercenters that offer less selection but cheaper prices than traditional grocery stores. Grocery sales at stores like Walmart, Target, and Costco grew at a rate of 10 percent a year over the past five years, according to Packaged Facts, a market research firm. Sales at traditional grocery stores are growing closer to 4 percent.

For the first time last year Wal-Mart Stores Inc. generated more than half of its U.S. sales from groceries. The company can offer cheaper produce than a supermarket because it can use its enormous purchasing power to buy complete crops of apples in Washington and sell them in the U.S, Japan and South America, says Bernard Sosnick, a retail analyst at Gilford Securities.

Not every grocer is feeling a pinch from higher commodity costs. Whole Foods Market, which caters to shoppers who don't mind paying extra for organic lettuce, isn't as sensitive to the 2 to 3 percent bump in food prices this year predicted by the U.S. Department of Agriculture. Whole Foods' stock is up 88 percent in the past 12 months.

"If you are an upscale operator your ability to pass on inflation is much greater, but the middle-income stores are up against tough competition," says Karen Short, an analyst at BMO Capital Markets who covers grocery stores. "The high-end consumer is feeling better, but the middle- and lower-income levels are feeling much worse."

Traditional grocers already operate with low margins. The squeeze they are facing now is threatening those already slim margins. In December, Kroger Co., the largest grocery chain, lowered its full-year profit forecast. Kroger, Supervalu Inc. and Safeway Inc. each lagged the Standard and Poor's 500 stock index over the past six months. Supervalu was trading close to 18 in April. Now, after falling another 15 percent last week to $7.39, the stock is at its lowest point in nearly a quarter century.

Supervalu trades at 6.3 times its estimated earnings, about a third of its five-year high. Kroger and Safeway each trade at around 12 times estimated earnings, well below their five-year highs. Each offers a dividend yield of about 2 percent or greater, with Supervalu paying a 4.7 percent yield.

The good news for grocers is that some value investors, who pick stocks they think are undervalued, are starting to wade in. Some 20 mutual funds added Supervalu over the past six months, according to FactSet. More than 40 bought Kroger or Safeway. Of course, nearly three times as many fund managers bought Whole Foods.

Copyright 2011 The Associated Press.



Comments (0) Leave a comment 

Name
e-Mail (required)
Location

Comment:

characters left


Farmall® 100A Series

From field to feedlot, you need a tractor that can multi-task as well as you do. Case IH Farmall™ 100A ... Read More

View all Products in this segment

View All Buyers Guides

)
Feedback Form
Leads to Insight