Avoiding crowds and working from home can only mean one thing – more meals at home. Almost all grocers now offer delivery, and if you have to suffer one visit to a standalone store it will be to pickup groceries.
The largest and one of the most profitable chains in the U.S. is Kroger. It boasts a beta less than 1.0 – some defense against the huge volatility in the markets of late. For instance, from top to bottom the stock fell 11% while Apple declined nearly 20%.
Kroger generates lots of free cash flow, evidenced by their having paid down $1.5 billion of debt (for the year to the 3rd quarter of 2019). They will be reporting the fourth quarter soon.
The Zacks Consensus Estimate for fourth-quarter earnings has remained unchanged in the past 30 days at 56 cents. This suggests year-over-year increase of 16.7% from the prior-year reported figure.
In Canada, I’d prefer Empire Company Ltd. which owns Sobeys. They made a bold move by acquiring Safeway stores and suffered from amalgamation woes, but seem to have made it through the transition nicely.
“Our strong second quarter fiscal 2020 results reflect both top line growth and significant gross margin expansion. This has led to industry leading year over year EBITDA margin expansion. It is a testament to our team that EPS from continuing operations exceeded 50 cents for the first time since the first quarter of fiscal 2013, while all strategic initiatives are progressing with velocity,” said Michael Medline, President and CEO,Empire.
Empire has a slightly higher P/E ratio of 17X earnings (there’s earnings growth potential due to continued restructuring and a different model that the market leader), the stock fell only 9% during the market rout and the company continues to buy back stock in the market.
It is likely that most of the chains will benefit over the coming months, although I’ve only covered the two. As I’ve mentioned in previous articles, it’s earnings surprises that create stock moves (in both directions) and we can expect some decent upside surprises over the next few months as consumers adjust their behavior.