Are Supermarkets Worth A Shop?

By Glenn Curtis | October 30, 2009 AAA

With the near-term economic outlook unclear, some might argue that it makes sense to invest in supermarket chains. It's a traditional defensive play that makes a lot of sense to investors: everyone needs to eat, right? But I would argue that shares of traditional supermarket chains such as Winn-Dixie (Nasdaq:WINN) aren't the stocks to own right now.

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Why These Stocks Won't Satisfy Profit-Hungry Investors
The average consumer is struggling these days. Even those who still have good jobs are concerned about their futures. In my mind, this means that the masses are likely to be extremely cautious in what they spend - right down to the last penny.

While it's true that the consumer will still, almost regardless of conditions, need to buy food, soap, household cleaning products and things of that nature, the fact is that these days they don't have to go to a traditional supermarket to do so. In fact, these products are often available at large discount retailers such as Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), and even many of the deep discounters, such as Dollar Tree (Nasdaq:DLTR), are offering merchandise that is found at the typical grocery store.

It's not that I think grocery stores will disappear beneath the wheels of progress of behemoths such as Wal-Mart, which are increasingly stocking food. Grocery stores still tend to have a good selection, particularly in produce and fresh foods, and they tend to be in more convenient locations than their big-box competitors. But with so many retail chain options out there, and with many of them offering low prices, the supermarket just doesn't look as good as an investment as I think it used to.

At the Company Level
Winn Dixie, the Florida-based grocery store, which has a large footprint in Southeastern states released its first-quarter earnings this past week. Its sales were off 2%, its identical store sales were down 1.5%, and it reported a 15 cent loss. It's hardly inspiring news, and I don't think it will compel investors to get on board. Beyond that, it's also hard to like or get motivated by the 25 cents Wall Street expects the company to earn this year. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

At first glance, Kroger (NYSE:KR), the Ohio-based supermarket, seems more attractive. After all, it is expected to earn $2.05 this year. But going forward I believe the company could see some increasing competition from Wal-Mart (NYSE:WMT) or other discount stores consumers might already be visiting to save money. In short, I'm skeptical about what next year or the year after that might hold. And when all is said and done I think that there are better opportunities to be had out there.

The Way to a Comeback
Grocery stores aren't dead, but in my mind they must adapt by carrying other merchandise beyond food and household products. They must also become more competitive on price and create attractive store fronts to bring shoppers in. If grocery store stock prices come down, it may change the equation as well, so stay tuned.

Bottom Line
While I think that Winn Dixie and Kroger are good companies, I am not a fan from an investment standpoint. Right now, the competition for grocers is extremely fierce and the economy is uncertain. For now, I'm steering clear of these stocks, but I may revisit them at a later date. After all, everyone needs to eat. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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