Supermarkets Industry Outlook: Omnichannel Plans Hold the Key

The Zacks Retail - Supermarkets industry comprises supermarket retailers, which offer products like grocery, health and beauty aids, household chemicals, electronics, stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, entertainment products, home furnishings and much more.

Players in the industry operate through various formats such as supermarkets, multi-department stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs among others. Nevertheless, food retail accounts for a chunk of their business.

Let's take a look at the three major industry themes:

• The consumer-driven industry's prospects appear bright given a conductive consumer environment. Thanks to a robust job market and higher disposable income, consumer environment has remained favorable. Major supermarket retailers are likely to continue gaining from a robust comps trend, which has been backed by strategic efforts to enhance store and e-commerce experience. As brick-and-mortar are still largely important (especially for grocery shoppers), companies are set to gain from store expansion and remodelling, merchandise enhancement endeavors, product innovation, compelling pricing strategy and efforts to replenish assortments given consumers' willingness to spend on premium and organic foods.

• Well, the industry underwent a massive change after Amazon (AMZN) took over Whole Foods Market in 2016. The online giant's move impelled several players to sharpen their act to survive the competitive frenzy. Incidentally, companies have been stepping up their omni-channel game through alliances, mergers and acquisitions. Also, supermarket retailers are adopting numerous ways to improve delivery and payment systems, in particular, to expand in the booming online grocery space. To this end, companies' same-day and last-mile delivery services, and buy online and pick up in store facilities bode well.

• Investments associated with e-commerce developments and the compelling pricing strategy, however, have been putting pressure on margins. Also, competition from private-label brands, elevated transportation costs, high wage expenses and food cost inflation remain hurdles. Though supermarket players are expected to continue witnessing improved revenue trends, a higher mix of e-commerce sales and the aforementioned costs may offset the benefits.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Retail - Supermarkets industry is housed within the broader Zacks Retail - Wholesale sector. The industry currently carries a Zacks Industry Rank #111, which places it in the top 44% of more than 250 Zacks industries.

The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry's position in the top 50% of the Zacks-ranked industries is a result of an impressive earnings outlook for the constituent companies in aggregate.

Given the promising prospects, we present a few stocks that have the potential to outperform the market. But before that, it's worth taking a look at the industry's shareholder returns and current valuation.

Industry Beats on Stock Market Performance

The Zacks Retail - Supermarkets industry has performed better than the Zacks S&P 500 composite as well as the broader Zacks Retail - Wholesale sector over the past year.

While the industry has lost 2.6% over this period, it fares better than the S&P 500's loss of 6.1% and the sector's decline of 4.5%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 18.6X compared with the S&P 500's 15.4X and the sector's 21.8X.

Over the past five years, the industry has traded as high as 23.3X, as low as 12.5X, and at the median of 15.8X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

While digital transformation has become the need of the hour, the importance of brick-and-mortar is not being ignored. Thus, companies in the space are likely to gain from their omni-channel efforts. However, increased mix of e-commerce sales, increased promotions, compelling pricing and intense competition may keep margins under pressure.

Notably, one stock from the Retail - Supermarkets universe currently sports a Zacks Rank #1 (Strong Buy), while a major stock carries a Zacks Rank #2 (Buy). We are also presenting a stock with a Zacks Rank #3 (Hold) that is well positioned to capitalize on the opportunities. You can see the complete list of today's Zacks #1 Rank stocks here .

Ingles Markets, Inc. (IMKTA) has an estimated long-term earnings growth rate of 9.1%. The Zacks Rank #1 company has seen its estimates for the current fiscal EPS jump 3.2% over the last 30 days.

Price and Consensus: IMKTA

Walmart Inc. (WMT): This world's largest retailer has gained close to 12% over the past six months. The company, which has seen its earnings estimates for the current fiscal increase over the past 30 days, currently carries a Zacks Rank #2. Also, Walmart boasts an impressive earnings surprise history, while the supermarket biggie has a long-term EPS growth rate of 5.1%.

Price and Consensus: WMT

The Kroger Co. (KR), which has gained 3% in the past year, carries a Zacks Rank #3. The Zacks Consensus Estimate for current fiscal EPS has gone up in the last 30 days. Kroger, which has surpassed earnings estimates by an average of 8.9% in the trailing four quarters, carries a long-term EPS growth rate of 6.8%.

Price and Consensus: KR

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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