According to the Goldman Sachs said in a note to clients on Tuesday that the return of restaurants and higher food prices would put pressure on supermarket stocks in the coming months. In this regard analyst Kate McShane downgraded Kroger’s selling rating from Neutral and Albertson to Neutral from Buy. Saying companies are likely to be affected by weak demand and rising costs.
While, the Kroger is down 3.7% to $ 35.99 in recent trade. Albertsons’ share price is down 2.2% to $ 18.44, although shares have risen more than 41% since Barron’s recommended in September. McShane is concerned that mass vaccinations will allow for a reopening of the economy that will cause consumer demand to shift, at least gradually, toward eating out. As a result, grocery sellers can conduct more promotions – which were relatively restrictive during the pandemic creating a more price-competitive environment.
While reopening the door to anxiety is not new, inflationary pressures could add another concern, given that supermarkets have limited capacity for higher passage to consumers. McShane wrote that during the last period of high inflation, in 2017, gross margins fell 41 basis points for the Kroger and 58 basis points for the Albertsons. When the Consumer Price Index for Food at Home surpassed 4%, most recently in 2011, Kroger’s gross margins fell by 133 basis points. The analyst notes that Albertson’s recent earnings call included a comment that inflation is currently between 3% and 4%, and that “anything in excess of 4% will not be fully passed on to customers, indicating that inflationary rises (as opposed to incremental increases) are also more difficult.
So why not say sell to both companies, given their similarities? McShane says Albertsons appears to be in a better position to handle rising inflation, given its greater exposure to fresh food – 42% of its business, compared to 25% for Kroger. This category is “better at mitigating the risk of inflation than prepacked food.” Additionally, Albertsons’ profit margins provide a bit more protection to absorb the increase, and its stock is still trading at a discount from Kroger. Now, what is your take on this? Do you agree? Or disagree? Let us know in the comment section below!