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Posts from May 2016

Grocery stores stuck in the slow checkout line

Posted on May 17, 2016 in

Just last week small grocery boutique Fairway Group (FWM) filed for Chapter 11 bankruptcy protection as the former growth engine of the industry, Whole Foods (WFM), reported disappointing quarterly revenue and flat profit. These events are just the latest in what’s been a difficult run for grocery operators. The S&P 500 Food Retail industry group has lost 8% of its value this month, creating a nearly 15% hit for investors this year.

The poor performance of grocery store stocks is somewhat of a surprise since they are in what’s considered to be a defensive industry, which means business tends to hold up even during times of economic slowness. Shares in another key defensive industry, utilities, have completely diverged and are up 14% this year.

Hardest hit have been the specialty groceries that operate in niches such as in organic food that are getting increasingly encroached upon by larger grocers like Kroger (KR) or mass retailers like Costco (COST), says Phil Terpolilli, analyst at Wedbush Securities. “Traditional and mass retailers have added more organic, perishable, and other specialty items that (some specialty) retailers ... carried somewhat exclusively,” he says.

Investors shouldn’t read too much into the difficulties of Fairway, says Chuck Cerankosky, analyst at Northcoast Research. It was a very small chain, with just 15 locations in New York, New Jersey and Connecticut, and he says “should never have gone public.” The company never made money during its time as a public company, he says, and lost more than $40 million the past two years and even more than that in the two years previous to that.

Whole Foods is profitable, but greater competition and the rise of new stores is putting pressure on growth. The company’s adjusted profit is expected to fall 6.7% this year and not return to 2015 levels until 2018, says S&P Global Market Intelligence data. Shares of Whole Foods have lost about a third of their value the past 12 months to $30.21. Analysts remain bearish, saying the stock will be worth just $29.73 in 18 months.

Some operators will find ways to stay relevant, like Kroger, Cerankosky says. Kroger’s adjusted profit is expected to rise nearly 9% in the current fiscal year and analysts rate the stock “outperform.” But even Kroger’s shares are down 15% this year. Consumers, right now, are the biggest winners from greater competition and lower prices and more fresh food choices, Cerankosky says. “Now organic is everywhere you look,” he says. “It’s a macro benefit for consumers.”

Follow Matt Krantz on Twitter @mattkrantz

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