The Covid-19 pandemic offered a boon to supermarkets, as lockdowns and job losses meant many more people were eating at home. Yet headwinds are coming for the group,
Analyst Kate McShane lowered her rating on
stock (ticker: KR) to Sell from Neutral on Tuesday, and cut her price target to $31 from $37. She also downgraded
(ACI) to Neutral from Buy and took her target to $20 from $23.
Kroger is down 3.7% to $35.99 in recent trading. Albertsons is off 2.2% to $18.44, although the shares have risen more than 41% since Barron’s recommended them in September.
McShane is concerned that mass vaccinations will allow for an economic reopening that will cause consumer demand to shift, at least incrementally, toward eating out. As a result, grocers could run more promotions—which were relatively constrained during the pandemic—creating a more price competitive environment.
While the reopening concern isn’t new, inflationary pressures could add another worry, given that supermarkets have limited ability to pass on higher to consumers. McShane writes during the last period of rising inflation, in 2017, gross margins fell 41 basis points at Kroger and 58 basis points for Albertsons.
When the Food at Home Consumer Price Index exceeded 4%, most recently in 2011, Kroger’s gross margins declined 133 basis points. The analyst notes that Albertsons’ recent earnings call included commentary that inflation is around 3% to 4% currently, and “anything beyond 4% would not be fully passed on to customers, noting inflationary spikes (vs. gradual increases) are also more challenging.”
So why not say sell on both companies, given their similarities? McShane says that Albertsons looks better positioned to handle rising inflation, given that it has more exposure to fresh foods—at 42% of its business, compared with 25% for Kroger. That category “is better at mitigating inflation risks compared with packaged foods.” In addition, Albertsons’ margins offer slightly more cushion to absorb the increase, and its stock still trades at a discount to Kroger.
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