Grocery stores have benefited from the slowing economy as consumers choose to eat at home instead of dining out. However, the industry has been challenged on several fronts, ranging from higher prices for the items they carry to keeping up with the latest in technology to facilitate their operations and improve the shopping experience for their customers. Grocery stores have historically had low profit margins because of the low-cost items they sell. To maintain their financial positions and earnings, many are pushing customers to higher gross margin products like bakery, deli and produce items. I will take this opportunity to analyze five major grocery stocks which are reacting to current market conditions. I chose these five companies for my research because they all have a large market presence which provides a good basis for analysis of the grocery industry.
Kroger Co. (NYSE:KR): Shares are trading around $24 at the time of writing. As one of the nation's largest traditional grocery retailer, Kroger has a $13.6 billion market capitalization. Its earnings per share are $1.94.
Last month, Kroger's Board of Directors declared a quarterly dividend of $.11 per share to be paid on March 1, 2012, to shareholders of record as of the close of business on Feb. 15, 2012. The company last year paid a $.46 dividend, which yields 1.9%.
Kroger's 52-week trading range is $21.14 to $25.85. Its price to earnings ratio is a 12.20, which is low compared to its competitors. The grocer has faced increased competition from low-price chains like Safeway (NYSE:SWY) not to mention private companies like Publix. This has placed pressure on the company's operating and gross margins, which are 2.59% and 21.7%, respectively.
Kroger's single digit gross margin is in line with other grocery retailers. Stores in the industry are have had to implement a host of strategies to keep their costs competitive. To compete with retailers like Wal-Mart (NYSE:WMT) that offer one-stop shopping, including gas stations, Kroger has rolled out its own fuel centers. The grocer allows customers to earn discounts by using their Kroger plus cards at Shell (NYSE:RDS.A) gas stations, too.
The company had revenues of $89 billion last year and a net income of $1/1 billion. Its price to earnings ratio is 12.20. While the company's gross margin is low, its concerted efforts to remain competitive make it a buy in my opinion.
Safeway Inc. (SWY): Shares are trading around $22 at the time of writing, which was within the company's 52-week trading range of $15.93 and $25.43. Safeway has a market capitalization of $7.5 billion. Its earnings per share are $1.48.
Revenues for the grocery retailer were about $43 billion last year. Its net income was $529 million. Safeway pays a dividend of $.58, yielding 2.7%.
Although Safeway tends to appeal to more upscale shoppers than Wal-Mart and other discounters, its margins are in line with others in the industry. Its operating margin was 2.88% and its gross margin was 28.63%. It has a large presence in California, which is a state that Wal-Mart has not been able to stake a large claim in. This has helped Safeway maintain its competitive edge in the state.
The company's price to earnings ratio is 14.80. While Safeway's prices can be as high as 20% more than those of competitors like Wal-Mart, the company has a loyal following of customers willing to pay the higher prices. Being able to stand out among competitors even with pricier items that customers are willing to pay for is one of the advantages that benefits Safeway's bottom line. I rate this stock a buy.
Whole Foods Market Inc. (WFM): Shares were trading around $82 at the time of writing, which was flirting with the grocer's 52-week trading high of $82.36. Its 52-week low was $53.32. The company has a market capitalization of $13.9 billion.
Whole Foods enjoys being one of few specialty gourmet stores in the market. Its earnings per share are $1.93. The company expects its earnings to increase to between $2.28 and $2.32 this year. Its price to earnings ratio is a strong 40.38. Its operating margin is 5.51%, which is in line with the typical grocery store. However, the company's gross margin is among the strongest in the industry at 34.99.
In February, the company announced its results for the first quarter ended Jan. 15, 2012. Officials reported that the company produced a 5.6% operating margin, and increased its earnings per share 28% to $.65. It also increased its operating margin and EPS outlook for fiscal 2012.
Sales increased 13% to $3.4 billion. Earnings before EBITDA increased 21% from the prior year to $283 million, and net income increased 33% to $118.3 million.
Whole Foods has been able to capture and retain customers willing to pay top dollar for its products. While many of the products sold by Whole Foods are more expensive than those at other grocery stores, the company boasts that many of its items are priced to be competitive with other stores. The company's ability to retain a loyal following has contributed to its success. Whole Foods is a buy in my opinion.
Costco Wholesale Corp. (COST): Shares are trading around $84 at the time of writing, which was within the company's 52-week trading range of $69.54 and $88.68. Its earnings per share are $3.32.
Costco pays a dividend of $.96, yielding 1.1%. In January, it announced a dividend declaration of $.24 to shareholders of record at the close of business on Feb. 10, 2012.
The company recently reported net sales of $7 billion for the month of January, which was an increase of 11% from $6.30 billion during the similar period last year. For the first 22 weeks of its reporting period ended Jan. 29, 2012, the company reported net sales of $40.18 billion, an increase of 11 percent from $36.08 billion during the similar period last year.
With a market capitalization of $1.4 billion, Costco benefits greatly from being a one-stop shopping experience. Customers can buy groceries and household staples at discounted prices that are often not found at typical grocery stores.
Its revenues were $91 billion, and its net income was $1.4 billion. Its gross margin was 12.48% and its operating margin was 2.69%. The price to earnings ratio was 25.37.
Costco is well-positioned to continue its quarterly revenue increases. Its margins and P/E ratios reflect that. A key consideration in evaluating Costco is the company's membership-only platform. A drop in the number of customers willing to pay a fee to belong to Costco would negatively affect the company's income. This is especially the case in economic downturns. Still, Costco is forging ahead, even opening new warehouses, which signals it has the revenue to dedicate to its continuing expansion.
I rate Costco a buy.
Supervalu Inc. (SVU): Shares were trading around $7 at the time of writing. The grocer's 52-week trading range was $6.26 and $11.77. Its market capitalization is $1.4 billion.
Supervalu is under extreme pressure to right its financial ship. In January, it reported that its third quarter fiscal 2012 net sales were down $750 million to $8.3 billion. That represented a net loss of $3.54 per diluted share. Third quarter retail food net sales were $6.3 billion compared to $6.6 billion the previous year.
The company paid a $.35 dividend, yielding 5.10%. Its operating margin is 2.75% and its gross margin is 22.6%. While these fundamentals are in line with competitors, investors should view them with considerable caution.
Concerns about the company's financial stability stem from its continuing revenue declines. The company has reported losses in quarterly revenues for the last four years. The company blames decrease on identical store sales of negative 2.9%.
The grocery store has been unable to compete against others in the industry. For example, its computer systems lag those of its competitors. Such hindrances have caused the company's revenues to sink. There are even whispers that the company is on the verge of bankruptcy.
The company is taking drastic steps to right its financial ship. That includes slashing jobs. However, it is unclear if it will be enough to help the grocery story regain its financial footing. SuperValu is a hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.