Grocery store stocks have held their value a lot better than the market this year as investors seek safety from inflation and an uncertain economic outlook. Keeping that streak going won’t be easy.
on Thursday said same-store sales excluding fuel increased 4.1% in the quarter ended May 21 compared with a year earlier, better than the 3.7% increase analysts polled by Visible Alpha had expected. Operating profit was about 7.5% higher than the number analysts were penciling in.
Inflation is clearly having an impact on customers’ shopping behavior. Customers are paying more per shopping trip at Kroger but putting fewer units into their baskets, Kroger said on an earnings call Thursday. Customers are economizing in various ways, such as buying bigger packs of certain items. Same-store sales of Kroger’s private-label brands grew 6.3% in the latest quarter, a healthier pace than national brands.
Some of this penny-pinching behavior isn’t such a bad thing for Kroger, for which private-label products comprise more than a fifth of sales excluding fuel. Gross margins on its own brands are about 600 basis points higher than national brands. But that wasn’t enough to offset higher supply-chain costs and so-called price investments, or discounts.
The company’s gross margin declined by 1 percentage point to 21.6% in the latest quarter. Kroger did manage to keep a handle on operating costs, which were nearly 6% lower compared with a year earlier. The company said it found new ways to cut costs, including a new bakery forecasting tool that helped reduce waste.
Kroger said it expects same-store sales to increase 2.5% to 3.5% in its current fiscal year ending early 2023, higher than the 2%-3% range it telegraphed three months ago. It also raised expectations for profit. Despite the rosier outlook, Kroger stock fell slightly after the earnings call.
There are two things that may be keeping investors on the sidelines. First, there is concern that Kroger may have lost some grocery market share. While its same-store sales grew 4.1%, that falls behind the 8.9% growth that supermarkets saw in roughly the same three-month period, according to data from the Census Bureau. There is a risk that margins will face even more pressure in future quarters if Kroger has to discount products more to draw customers.
Second, Kroger stock has vastly outperformed the market this year—rising 12% compared with the S&P 500’s 23% decline—as investors look to sectors that can withstand inflation and an economic slowdown. Its shares have tended to zig when the market zagged, rising after Russia’s invasion of Ukraine and following higher-than-expected inflation data. As a result, its share price as a multiple of expected forward-12-month sales is 14% above its 10-year average, and near peak valuation levels it has hit during past episodes of market stress in 2007 and 2015.
Even as consumers keep loading up on groceries, at these prices investors might turn more cautious about loading up on grocery stocks.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
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