The grocery and club stocks to own in 2024, according to Bernstein

Last year was a messy one for Grocery/Mass/Club, or GMC, names, according to Bernstein. For 2024, the firm expects things to stabilize and improve, even if that may not be linear. Overall, the firm is cautious about the first half of the year, but likes the set-up for the second half and beyond. Kroger (KR) is Bernstein’s top GMC pick right now.

2024 OUTLOOK: Looking at 2024, the firm expects Grocery inflation to settle into the long-single-digit range, and if no deflation, it expects it to be shallow and short-lived. All in, Bernstein expects low-single-digit grocery market growth and modest margin improvement. Grocery disinflation and Gen Merch deflation through the first half of the year will help reignite discretionary spending, with net favorable topline and gross margin impact, it adds. The firm also believes shrinkage will peak in 2024 and begin to roll over in 2025. Bernstein remains bullish on Retail Media Advertising, especially for Walmart (WMT) and Kroger plus Albertsons (ACI). In short, it expects the macro environment and consumer spending to improve, but there’s still uncertainty on timing and magnitude.

PICKS FOR 2024: Kroger is the firm’s top GMC pick right now. It expects stable low-double-digits topline, with continued high-single/low-double-digits e-commerce growth, leading to improved e-commerce economics, and accelerating Ad Revenue growth. The Albertsons deal will accelerate combined Op Profit growth as it expands Kroger’s Household reach from 42% to about 70%, and makes the latter even more of a destination retailer for CPG advertisers, Bernstein says.

The firm still likes Albertsons as a deal stock — still a divergent perspective. Bernstein remains with high conviction the Kroger/Albertsons deal will close. It also likes C&S as the acquirer of the divested stores, and that the FTC is still in talks with Kroger about a divestiture plan. Moreover, Bernstein thinks the FTC is better off reaching an agreement with Kroger than suing to block the deal and risk losing in court.

Regarding Costco (COST), the firm believes it all comes down to multiple, and Bernstein is “good with it.” Even at 40-times forward price-to-earnings, Costco is a stock that the firm believes, five years from now, “we will want to have had in our portfolio, and that’s how we believe buyers of the stock actually think about it.” It’s crowded, but with less “priced for perfection” risk because it reports sales monthly, the firm adds, noting that with decades of new-store runway, it expects it to remain a reliable compounder.

On Target (TGT), good news will help more than bad news will hurt, Bernstein believes. The buyside remains skeptical, expectations remain low, and the stock is near the bottom on crowding. Some bad news is already priced in, the firm says, adding that while it is cautious about the first half of the year as there’s a lot Target needs to do to restore investor confidence, there is also a host of reasons why Bernstein thinks that’s possible. The firm expects more clarity by the second half of 2024.

Bernstein still ranks Walmart among the strongest companies in its sector. The stock is more complicated as Walmart is crowded and has the “priced for perfection” risk. The firm further believes there’s more that can go wrong for Walmart than for Costco given the tension between growth and margin. And right now, Bernstein says it can’t endorse the combination of sales growth, op profit growth and multiple needed to get to an Outperform rating.

TARGET CHANGES: Bernstein raised its price targets for Outperform-rated Costco to $700 from $670, Outperform-rated Target to $160 from $145, and Market Perform-rated Walmart to $175 from $165.