Our Top Grocery Retailers for 2011

|
 |  Includes: COST, DG, DLTR, HAIN, KR, SVU, SWY, TGT, WBA, WFM, WMT
by: Rick Shea

Food retailing has been dominating the news lately with a focus on food inflation, food safety and competition for the almighty consumer’s dollar. Rising commodity prices on grains, sugar, cocoa, coffee and dairy products have got consumers, retailers and manufacturers all a little nervous. Despite intense competition, retailers in all formats continue to add food and grocery products to their mix because they know it drives shopper traffic.

Target (NYSE:TGT) continues to expand its PFresh concept to its general merchandise stores. Drug stores Walgreen (WAG) and CVS Caremark (NYSE:CVS) have got into the act and regularly feature milk, cereal, snacks and other household necessities. Retail heavyweights Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) are looking more favorably at store expansion with emphasis on the East and West Coasts. While Dollar Store competitors Dollar General (NYSE:DG), Family Dollar (NYSE:FDO) and Dollar Tree (NASDAQ:DLTR) all continue to add both branded and private label food items. Food is everywhere and competition remains intense for shopper traffic.

For this article we will be focusing on analyzing the top food retailers and current trends for 2011. First, let’s look at the major segments or types of retailers that sell food and grocery products.

  • Traditional Supermarkets (54% of food/grocery $ sales): Kroger (NYSE:KR), Safeway (NYSE:SWY), Super Valu (NYSE:SVU). Regional competitors: Publix, Winn Dixie (NASDAQ:WINN), HEB, Stop n Shop, Giant Eagle.

  • Mass Merchandisers (26% of sales) (Wal-Mart, Target, Meijer)

  • Natural/Organic Health (5% of sales) Whole Foods (WFMI),Trader Joe's

  • Club stores (10% of sales) Costco, Sam’s, BJ’s

  • Convenience Stores ( 2% of sales) 7-11, Holiday, Casey's (NASDAQ:CASY)

  • Dollar Stores ( 2% of sales) Dollar General, Dollar Tree, Family Dollar

  • Extreme Value Discounters (1% Save-A Lot, Aldi)

During the recession, growth was strongest at Dollar Stores and Extreme Value stores as consumers flocked to the lowest price in town. Even Wal-Mart suffered as extreme discount stores cut into their turf. In 2009 and 2010, retailers' margins suffered as price competition hit an all time high with both food manufacturers and retailers cutting prices to lure shoppers.

As we head into 2011, we are seeing competition stabilize with less discounting, some price increases and a consumer that it somewhat returning to putting quality over price. Sales growth has returned to the more premium priced Natural and Organic Channel. More upscale retailers like Target and Costco are also seeing better comps both on food and general merchandise. On the other side of the coin, discounters in the dollar store format are still enjoying strong growth. They cater to the lower income shopper that is underemployed and still part of the Great Recession on employment.

Listed below is a summary of performance indicators for the top food retailers including market cap, sales growth estimate for 2011, current P/E, PEG (price to growth) and net margins. Sales growth and EPS growth are current year 2011 estimates based on analysts’ forecasts.

Top CPG and Food Retailers

Market Cap

$ Sales

$ Sales Growth

EPS Growth

P/E

PEG

Wal-Mart

202 B

444 B

+5

+10%

14.0

1.33

Costco

31 B

92 B

+8

+15%

23.7

1.65

Target

38 B

70 B

+4

+13%

14.3

1.08

Whole Foods

8.7 B

11 B

+11%

+12%

35.2

1.68

Kroger

13.5 B

85 B

+5%

+10%

12.6

1.36

Safeway

7.6 B

42 B

+1.5%

+13%

N/A

1.12

Super Valu

1.6 B

37 B

-1.6%

-7%

N/A

1.42

Dollar General

9.7 B

14 B

+9%

+18%

19.9

.81

Dollar Tree

6.4 B

6 B

+10%

+15%

17.9

1.03

Walgreen

37 B

75 B

+5%

+15%

18.0

1.17

Click to enlarge

Based on current consumer shopping trends, margins, future growth and stock valuation, our favorites in the space are as follows:

Target: Their expansion of food via the Pfresh concept as well as expansion of Supercenters should drive shopper growth and revenues. They should also benefit from a more confident consumer and economy. Valuation for their stock is reasonable.

Dollar General: The company is reasonably valued and growth should continue, especially if we have a jobless recovery. Dollar stores were able to get favorable leases and expand during the recession and should continue to gain market share with more low priced food offerings. Margins, like all retailers, are tremendously tight, but Dollar General benefits from scale and should maintain their focus on cost efficient operations.

Costco: Although stretched on valuation, Costco continues to put up solid growth and has a strong consumer franchise. Along with Target, they have both a solid position on quality and value that should continue to drive traffic as the economy improves.

Walgreen: Although not a traditional food retailer, they are benefiting from increasing traffic, helped by carrying more food items. Walgreen is better positioned than CVS as the drugstore leader and should exceed sales growth estimates.

Trader Joe’s: They are Whole Foods' primary competitor, but they have done a better job of carving out a strong perception of value in the fast growing natural and organic space. Unfortunately, Trader Joe’s is private so the only way to invest in their growth is through Natural food suppliers like United Natural Foods (NASDAQ:UNFI) or Hain Foods (Hain).

Of the remaining retailers we like Whole Foods but are scared away by their relatively high PEG. We are also impressed with results at Aldi but it does not trade on US stock exchanges. Kroger has been the top performing traditional retailer but we expect competition from Walmart, Meijer and Target along with commodity pressures to limit growth going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.