While Target Corporation (TGT) contends with sales woes, retail crime, and store closures, the thriving grocery sector, fueled by strong consumer spending, technology innovations, and inventive delivery methods, suggests that investing in prominent grocery stocks Costco Wholesale Corporation (COST), Weis Markets, Inc. (WMK) and Albertsons Companies, Inc. (ACI) could be wise.
Let’s understand this in detail.
Over recent months, TGT has experienced a pronounced downturn in its stock market performance, notably underperforming the robust gains observed in the broader S&P 500 index throughout 2023. Shares of TGT have plunged 29.5% over the past year, closing the last trading session at $108.99.
The company faces an additional challenge due to substantial losses from organized retail crime and in-store theft. Despite the retailer's efforts to enhance loss prevention measures, theft and retail crime incidents surged by 120% in the first five months of this year compared to the same period last year.
As a result, the company foresees an extra $500 million in theft-related losses for the current fiscal year compared to the previous year. Consequently, nine stores across four states are being closed, impacting worker safety and causing substantial profit declines.
While TGT grapples with its challenges, the grocery sector as a whole seems to be performing relatively well. To the delight of the economy, overall retail spending experienced a 3.4% increase in September, outpacing the 2.5% year-on-year growth seen in August 2023.
The standout in the month's data was the grocery sector, which experienced a 7% surge in spending during September. This increase in grocery expenditure outperformed the year-on-year growth reported in July and August 2023.
Looking forward, consumer-driven evolution in grocery delivery models, such as BOPIS and curbside pickup, is expected to propel the sector's progress. As customers adopt new methods that align with their consumption patterns, a notable shift in behavior is becoming apparent, promising further industry development.
Furthermore, grocery retailers are harnessing technology to harmonize their supply chain, staff scheduling, and inventory management with front-end customer interactions, offering real-time product recommendations. This seamless integration is elevating the industry, enhancing both e-commerce and in-store experiences.
As per a report by Grand View Research, the global food and grocery retail market size is expected to grow at a CAGR of 3% and reach $14.78 trillion by 2030.
Considering the outlined factors, COST, WMK, and ACI could offer more favorable investment opportunities compared to TGT, capitalizing on the prevailing industry growth trajectories. To that end, let us dive into the fundamentals of these three Grocery/Big Box Retailers industry picks, beginning with number three.
Stock #3: Costco Wholesale Corporation (COST)
COST offers a diverse range of branded and private-label products in various merchandise categories. It operates pharmacies, optical centers, food courts, hearing-aid facilities, tire installation centers, and gas stations, and provides online services including business delivery, travel arrangements, same-day grocery delivery, and more.
In terms of forward EV/Sales, COST is trading at 0.96x, 42.8% lower than the 1.68x industry average. In addition, the stock’s forward Price/Sales multiple of 0.99 is 11.3% lower than the industry average of 1.11.
For the 17 weeks that ended September 3, 2023, COST’s total revenue increased 9.5% year-over-year to $78.94 billion. Its operating income rose 11.4% from the year-ago value to $2.78 billion.
Furthermore, net income and net income per common share attributable to COST grew 15.6% and 15.7% from the prior year’s period to $2.16 billion and $4.86, respectively.
For the fiscal year ending August 2024, COST’s revenue is expected to increase 4.8% year-over-year to $253.97 billion. The company’s EPS for the current year is estimated to grow 10.6% from the previous year to $15.67. Shares of COST have gained 24.8% year-to-date to close the last trading session at $565.52
COST’s sound fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
COST has a B grade for Stability and Sentiment. It is ranked #22 in the 38-stock A-rated Grocery/Big Box Retailers industry.
In addition to the POWR Ratings I’ve just highlighted, you can see COST’s ratings for Growth, Value, Quality, and Momentum here.
Stock #2: Weis Markets, Inc. (WMK)
WMK retails food products in Pennsylvania and neighboring states. The company's inventory encompasses national, local, and private brands, spanning natural, gluten-free, and organic options. It manages approximately 197 food stores in total.
In terms of trailing-12-month EV/Sales, WMK is trading at 0.33x, 80.5% lower than the 1.68x industry average. Its trailing-12-month EV/EBITDA multiple of 6.19 is 49.3% lower than the industry average of 12.23. Moreover, the stock’s trailing-12-month Price/Sales of 0.36x is 65.9% lower than the 1.07x industry average.
For the second quarter that ended July 1, 2023, WMK’s net sales increased 3.8% year-over-year to $1.18 billion. Its income from operations stood at $45.62 million. Additionally, the company registered a net income and EPS of $34.27 million and $1.27, respectively.
The stock has gained 1.1% over the past month, closing the last trading session at $64.56.
WMK’s positive prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
WMK has a B grade for Stability, Value, and Quality. It is ranked #14 out of 38 stocks within the Grocery/Big Box Retailers industry.
Click here to access the additional WMK ratings (Growth, Momentum, and Sentiment).
Stock #1: Albertsons Companies, Inc. (ACI)
ACI is a food and drug retailer that manages about 2,271 stores spanning 34 states. The company's operations include around 1,722 pharmacies, 1,328 in-store branded coffee shops, 401 affiliated fuel centers, 22 specialized distribution centers, 19 manufacturing facilities, and diverse digital platforms.
On July 27, ACI and Safeway unveiled Vine & Cellar, an online platform offering meticulously curated wines delivered directly to customers' homes. Exclusive to California, Vine & Cellar features an extended range of wine varietals and global wine regions.
The strategic move is expected to bolster ACI's prospects by tapping into the lucrative wine market, expanding its product portfolio, and catering to the growing demand for premium and curated wines in California.
In terms of forward non-GAAP P/E, ACI is trading at 8.18x, 51.9% lower than the 16.99x industry average. Its forward EV/EBITDA multiple of 6.34 is 43.6% lower than the industry average of 11.25. Also, the stock’s forward Price/Sales of 0.16x is 85.2% lower than the 1.11x industry average.
For the 16 weeks ended June 17, 2023, ACI’s net sales and other revenue increased 3.2% year-over-year to $24.05 billion. Its gross margin grew 1.8% from the year-ago value to $6.66 billion. In addition, the company registered a net income and net income per Class A common share of $417.20 million and $0.72, respectively.
The consensus revenue estimate of $80.71 billion for the fiscal year ending February 2025 indicates a 1.7% rise year-over-year. Likewise, the consensus EPS estimate of $2.79 for the next year exhibits a marginal year-over-year improvement. Over the past year, the stock has gained 16.7%, closing the last trading session at $22.72.
ACI’s sound outlook is apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
ACI has a B grade for Value and Quality. It has ranked #13 within the same industry.
Click here to access additional ACI ratings for Growth, Momentum, Stability, and Sentiment.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
COST shares were trading at $565.76 per share on Thursday afternoon, up $0.24 (+0.04%). Year-to-date, COST has gained 24.64%, versus a 14.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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