Inflation is one of the best things that could happen to the supermarket industry. The increasing rate of inflation is assisting these supermarkets in reporting larger volumes of sales.
Let’s take a look at how supermarkets are gaining from this record-high inflation.
To begin with, these supermarket chains are well-known for offering a wide range of products. As a result of growing inflation, shoppers are flocking to supermarkets, which provide a wide range of products, from low-cost to high-end items.
Second, with inflation at an all-time high, the practice of eating at home, which took off during the pandemic, should resurface. Restaurant prices grew at a reduced rate last month, but are still up 6.9% year-over-year, the highest 12-month gain since December 1981.
In such a market scenario, where food and beverage prices are constantly increasing, buying food from a supermarket is unquestionably a more cost-effective option than eating out at a restaurant.
Food Inflation Peaks
Food inflation is at an all-time high. According to the U.S. Department of Labor, inflation climbed 8.5% year-over-year in March, a four-decade high. Food prices rose 8.8% year-over-year, with grocery prices jumping by 10%.
Prices of daily consumables such as meat, baked beans, and dairy are rising as input costs rise. Furthermore, the war in Ukraine is projected to further raise the prices of commodities such as wheat, as well as grain-based goods such as flour and pasta. Therefore, a perfect blend of labor shortages, commodity price increases, the Russia-Ukraine crisis, supply-chain disruptions, and surging consumer demand have led to the rise in inflation.
As a result, supermarket owners will profit at the expense of their customers.
We’ve identified two supermarket stocks that look to benefit from rising prices.
Kroger (KR)
Kroger is America’s largest supermarket chain operator. It has a market capitalization of $42.2 billion and has gained over 50% over the past six months.
Last month, Kroger reported strong fourth-quarter earnings, with both the top and bottom lines improving year-over-year. The company saw a 4% increase in identical sales. We also observe that the company’s digital business continues to be a key growth engine, with a two-year stacked increase of 105%.
Robert Ohmes of BofA Securities feels that rising inflation should benefit the company. While increased food prices entail higher grocery store expenditures, he says that the extra cost is largely passed on to customers.
Ohmes tells investors, “We see U.S. consumers accepting the bulk of price increases given average hourly earnings are up 6% year over year.”
Furthermore, Ohmes anticipates the company’s earnings per share to increase over the next two to three years, “as elevated food inflation does not show signs of waning soon.”
As a result, he upgraded his rating on Kroger stock to a Buy from a Hold and raised his price target to $75 from $61.
In addition, investors remain bullish on Kroger shares. According to TipRanks’ Stock Investors tool, 11.1% of the investors holding portfolios on TipRanks have increased their stake in KR stock in the last 30 days. Furthermore, 2.4% of these individuals have increased their holdings in the past week.
However, not all analysts think the stock is a good investment. On TipRanks, Kroger has received a Hold consensus rating from Wall Street analysts based on five Buys, nine Holds, and three Sells. The average KR price target of $55.19 represents downside potential of 5.4% from current levels.
Albertsons (ACI)
Albertsons is one of the country’s major supermarket chains. It sells groceries, health and beauty products, pharmaceuticals, gasoline, and a variety of other goods and services. With a market capitalization of $16.6 billion, the stock has gained almost 71% over the last year.
The company’s focus on providing efficient in-store services, improving digital capabilities, and increasing productivity are all positives. The company is continuously trying to expand its product line, particularly in the fresh and Own Brands categories, to increase sales.
Retail price inflation and incremental sales drove the company’s strong fourth-quarter earnings. Net sales and other revenues totaled $17.4 billion, up 10.2% year-over-year, with an adjusted quarterly profit of $0.75 per share, up 25% from the year-ago quarter.
Further, Albertsons identical sales increased by 7.5%, aided by retail price inflation. Meanwhile, digital sales increased 5% year-over-year, while they surged 287% when stacked over two years.
Moreover, ACI has a “Perfect 10” Smart Score rating, supported by positive sentiment by bloggers and investors, increased purchases by hedge funds, and 6.1% asset growth in the trailing twelve months.
Turning to Wall Street, Albertsons stock earns a Moderate Buy consensus rating based on four Buys, four Holds, and 1 Sell. The average ACI price target of $35.00 implies just 5.5% upside potential.
Bottom Line
In a time of global uncertainty, when rising inflation is putting a strain on consumers, supermarket chains such as Kroger and Albertsons are well-positioned to benefit as customers accept and pay higher prices, allowing grocery firms to grow their top and bottom lines.
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