Two leading grocery chains, Kroger Co (NYSE:KR) and Albertsons Companies Inc. (NYSE:ACI), received downgraded ratings from Goldman Sachs.
A Shifting Landscape: Analyst Kate McShane noted that the grocery retail industry stood out within the past year’s economy “with outsized sales growth as a result of pandemic-related demand.”
But McShane observed that upcoming months might not be as favorable to this industry.
“As economies reopen and customer demand likely shifts incrementally towards food away from home, we think the promotional environment could become more competitive in grocery throughout the coming year,” she wrote. “That, coupled with potentially rising costs from inflation, results in multiple headwinds that could pressure margins for grocers.”
The Problem With Kroger: McShane downgraded Kroger from Sell to Neutral, with a price target lowered from $37 to $31.
McShane pointed to new challenges facing grocery retailers in general and Kroger in particular, calling attention to what she perceived as its “limited ability to insulate margins” and a “limited exposure to fresh” foods, which she considered “typically a category better at mitigating inflation risks compared to packaged foods.”
Still, McShane stated she would be more positive on Kroger’s viability if it can maintain the elevated consumer demand in the face of a recovering restaurant environment, along with internal initiatives that would “support greater cost savings than expected.”
But she also warned that would be predicated on lower-than-forecast inflation coupled with the company’s increased efficiency in digital marketing against its competition.
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The Problem With Albertsons: McShane downgraded Albertsons from Buy to Neutral, with the price target lowered from $23 to $20.
McShane’s reasoning mirrored her Kroger downgrade, citing changes to the grocery industry and the company’s “limited ability to insulate margins.”
Unlike Kroger, McShane noted, Albertsons had higher exposure to the fresh food category plus “compelling initiatives in place targeting its supply chain and buying strategy, which should provide an estimated 100 bps of gross margin improvement vs. 2019.”
McShane said that Albertsons was added to Goldman Sachs’ Buy list last July and is currently up by 20.3% versus the S&P 500’s 28.7%.
She attributed the stock’s less-than-stellar performance to “investor concern about the food at home unwind as the economy reopened,” although she also highlighted the company outperformed other national grocery retailers since last summer, including Kroger.
Potential problems for the company, according to McShane, ranged from continued margin pressures to hiccups in executing omnichannel initiatives to share loss to more aggressive competitors.
(Photo by marcusjroberts/Flickr Creative Commons.)
