A Low-Fat Future for Albertson's
On Oct. 31, No. 2 U.S. supermarket chain Albertson's (ABS) warned that it would miss previous forecasts, suggesting that even a staid business like groceries isn't immune to the dreary economy. It said third-quarter earnings per share would be in the range of 47 cents to 49 cents, down from previously forecasted 52 cents as a result of a steeper-than-expected 2% sales decline.
Earnings per share for the year will fall within the range of $2.10 to $2.14, down from $2.31 in 2001. Albertson's stock price fell 23%, to around $20, in the two trading sessions after the company announced the new guidance. The stock has weakened 36% so far this year, while the Dow Jones Food Retailers&Wholesalers group has shed 21% in the year-to-date.
The valuation is low, at about eight times EPS estimates of $2.47 for fiscal 2003. But that may not provide enough of an incentive to consider buying the stock at the moment. Herb Achey, senior equity analyst at wealth-management firm U.S. Trust, believes Alberston's should have a modest rebound sometime in 2003 if the economy improves. But he notes that the gains would be likely be short-lived because long-term trends are working against supermarkets. "You can't take your eyes off the larger issues," Achey says.
CHICKEN, NOT STEAK. That outlook is less than promising. Two factors contributed to Idaho-based Albertson's sales shortfall. For one, consumers are feeling the pinch of layoffs and heavy debt loads. Lately, shoppers are filling their carts with more chicken than steak and loading up on sale items.
"Directionally, we have been seeing traffic lighter. The average basket [dollar amount of purchase] is a little stronger. People are stocking up more at the start of the month...stretching to make it to the next paycheck," said Chief Executive Larry Johnston, at Albertson's recent earnings call.
"Escalating competitive activity" was the second factor, Johnston says. While its brethren in the supermarket sector -- Safeway (SWY) and Kroger (KR) -- announced plans to increase promotions or cut prices in the past year, Albertson's resisted. Now it will begin spending more on promotions to win back sales. That, along with deeper cost cutting, will be the "major culprit of the earnings shortfall for the next few quarters," says Jason Whitmer, analyst at Midwest Research. (Whitmer doesn't own the stock, and his firm doesn't have an investment-banking business.)
WAL-MART'S THREAT. Finding ways to differentiate itself is vital to improving Albertson's financial performance. It reported net earnings of $501 million after restructuring charges on $37.9 billion in sales for the fiscal year ended January, 2002. Sales inched up only slightly from $36.8 billion in the year ended January, 2001. EPS rose 6%, to $1.95 from $1.83.
While a stronger economy will help Albertson's, competition is growing only more cutthroat. Analysts expect that supermarkets and others in the food-retailing business will see fluctuating market share, while Wal-Mart (WMT) slowly but surely becomes a dominant player.
"They'll see some benefit from the economy coming back, but it's a question, too, of what these competitive threats will mean for the company," says Dan Geiman, an analyst at McAdams Wright Ragen. "There's quite a bit of negative sentiment in the industry." Geiman rates the stock a hold.
LOTS OF ALTERNATIVES. Competition comes from many directions. Increasingly, Wal-Mart Supercenters, which are combined supermarket and general- merchandise stores, are using lower prices to lure customers away from supermarkets. The retailing giant is increasing these kinds of stores at its fastest pace ever.
Wholesale clubs like Costco (COST) and Sam's Club, which is owned by Wal-Mart, entice price-sensitive customers with bargains in bulk. Wal-Mart's smaller Neighborhood Market, a groceries-only format, competes still more directly with grocers. And even dollar stores that sell some nonperishable food items are stealing market share. The growing popularity of dining out doesn't help, either.
Increasingly, consumers are choosing supermarket alternatives, says Janice Hofferber, food-retailing analyst at Fulcrum Global Partners. She doesn't rate the stocks of traditional supermarkets but instead covers companies like BJ's Wholesale Club (BJ) and Family Dollar (FDO), which are gaining market share. "We believe the winners will be those with class-A merchandising skills like Costco," she says.
"BUYING POWER." Hofferber notes that Albertson's strong balance sheet should make it one of the survivors among its peers. However, "it will likely have to make some changes to its business model as a result of this move" away from traditional grocery chains. At the end of the its most recent fiscal quarter, ended in August, Albertson's had $820 million in cash.
What can it do to attract more customers? The obvious solution is to lower prices. "Price and value are what consumers want," Achey says. One way to achieve lower prices is to expand. "If you're really going to fight Wal-Mart, you need to have size and scope. The answer is buying power," Achey says. He expects that Albertson's and the other top-level supermarkets will focus on acquiring second-tier regional players in 2003.
Albertson's operates 2,421 stores in 33 states. Wal-Mart has 1,179 Supercenters among its more than 4,500 stores globally. The discounter will add 200 to 210 Supercenters in 2003 but only 45 to 55 traditional discount stores.
SALAD-BAR SHOPPERS. One of Albertson's longer-term strategies is to market its new venue, stores that combine its grocery units with the drugstore chains it owns. Whitmer says the dual-brand concept, which has been rolled out in the past six to nine months, will clearly appeal to shoppers who like one-stop convenience. But it will take two years to get a clearer sense of how well the new outlets compete against similar offerings by Wal-Mart, Target (TGT), and others. Executives at Albertson's couldn't be reached for comment.
Harry Balzer, an analyst at NPD Group, says supermarkets must respond to the broad trend of dining out and to consumers' preference for ready-to-eat options. Already, more innovative chains have increased their selection of prepared foods like salad bars and roasted chicken that appeal to rushed customers. More offerings like that could help convince shoppers to choose supermarkets over other options.
Like all retailers, Albertson's will struggle as long as consumers are keeping a tight hold on their purse strings. But it's the long term that has Wall Street nervous. As it stands now, this grocer looks to be locked in a zero-sum game with a myriad of players. Until that changes, it's hard to see why investors would get excited about adding Albertson's to their shopping cart
Earnings per share for the year will fall within the range of $2.10 to $2.14, down from $2.31 in 2001. Albertson's stock price fell 23%, to around $20, in the two trading sessions after the company announced the new guidance. The stock has weakened 36% so far this year, while the Dow Jones Food Retailers&Wholesalers group has shed 21% in the year-to-date.
The valuation is low, at about eight times EPS estimates of $2.47 for fiscal 2003. But that may not provide enough of an incentive to consider buying the stock at the moment. Herb Achey, senior equity analyst at wealth-management firm U.S. Trust, believes Alberston's should have a modest rebound sometime in 2003 if the economy improves. But he notes that the gains would be likely be short-lived because long-term trends are working against supermarkets. "You can't take your eyes off the larger issues," Achey says.
CHICKEN, NOT STEAK. That outlook is less than promising. Two factors contributed to Idaho-based Albertson's sales shortfall. For one, consumers are feeling the pinch of layoffs and heavy debt loads. Lately, shoppers are filling their carts with more chicken than steak and loading up on sale items.
"Directionally, we have been seeing traffic lighter. The average basket [dollar amount of purchase] is a little stronger. People are stocking up more at the start of the month...stretching to make it to the next paycheck," said Chief Executive Larry Johnston, at Albertson's recent earnings call.
"Escalating competitive activity" was the second factor, Johnston says. While its brethren in the supermarket sector -- Safeway (SWY) and Kroger (KR) -- announced plans to increase promotions or cut prices in the past year, Albertson's resisted. Now it will begin spending more on promotions to win back sales. That, along with deeper cost cutting, will be the "major culprit of the earnings shortfall for the next few quarters," says Jason Whitmer, analyst at Midwest Research. (Whitmer doesn't own the stock, and his firm doesn't have an investment-banking business.)
WAL-MART'S THREAT. Finding ways to differentiate itself is vital to improving Albertson's financial performance. It reported net earnings of $501 million after restructuring charges on $37.9 billion in sales for the fiscal year ended January, 2002. Sales inched up only slightly from $36.8 billion in the year ended January, 2001. EPS rose 6%, to $1.95 from $1.83.
While a stronger economy will help Albertson's, competition is growing only more cutthroat. Analysts expect that supermarkets and others in the food-retailing business will see fluctuating market share, while Wal-Mart (WMT) slowly but surely becomes a dominant player.
"They'll see some benefit from the economy coming back, but it's a question, too, of what these competitive threats will mean for the company," says Dan Geiman, an analyst at McAdams Wright Ragen. "There's quite a bit of negative sentiment in the industry." Geiman rates the stock a hold.
LOTS OF ALTERNATIVES. Competition comes from many directions. Increasingly, Wal-Mart Supercenters, which are combined supermarket and general- merchandise stores, are using lower prices to lure customers away from supermarkets. The retailing giant is increasing these kinds of stores at its fastest pace ever.
Wholesale clubs like Costco (COST) and Sam's Club, which is owned by Wal-Mart, entice price-sensitive customers with bargains in bulk. Wal-Mart's smaller Neighborhood Market, a groceries-only format, competes still more directly with grocers. And even dollar stores that sell some nonperishable food items are stealing market share. The growing popularity of dining out doesn't help, either.
Increasingly, consumers are choosing supermarket alternatives, says Janice Hofferber, food-retailing analyst at Fulcrum Global Partners. She doesn't rate the stocks of traditional supermarkets but instead covers companies like BJ's Wholesale Club (BJ) and Family Dollar (FDO), which are gaining market share. "We believe the winners will be those with class-A merchandising skills like Costco," she says.
"BUYING POWER." Hofferber notes that Albertson's strong balance sheet should make it one of the survivors among its peers. However, "it will likely have to make some changes to its business model as a result of this move" away from traditional grocery chains. At the end of the its most recent fiscal quarter, ended in August, Albertson's had $820 million in cash.
What can it do to attract more customers? The obvious solution is to lower prices. "Price and value are what consumers want," Achey says. One way to achieve lower prices is to expand. "If you're really going to fight Wal-Mart, you need to have size and scope. The answer is buying power," Achey says. He expects that Albertson's and the other top-level supermarkets will focus on acquiring second-tier regional players in 2003.
Albertson's operates 2,421 stores in 33 states. Wal-Mart has 1,179 Supercenters among its more than 4,500 stores globally. The discounter will add 200 to 210 Supercenters in 2003 but only 45 to 55 traditional discount stores.
SALAD-BAR SHOPPERS. One of Albertson's longer-term strategies is to market its new venue, stores that combine its grocery units with the drugstore chains it owns. Whitmer says the dual-brand concept, which has been rolled out in the past six to nine months, will clearly appeal to shoppers who like one-stop convenience. But it will take two years to get a clearer sense of how well the new outlets compete against similar offerings by Wal-Mart, Target (TGT), and others. Executives at Albertson's couldn't be reached for comment.
Harry Balzer, an analyst at NPD Group, says supermarkets must respond to the broad trend of dining out and to consumers' preference for ready-to-eat options. Already, more innovative chains have increased their selection of prepared foods like salad bars and roasted chicken that appeal to rushed customers. More offerings like that could help convince shoppers to choose supermarkets over other options.
Like all retailers, Albertson's will struggle as long as consumers are keeping a tight hold on their purse strings. But it's the long term that has Wall Street nervous. As it stands now, this grocer looks to be locked in a zero-sum game with a myriad of players. Until that changes, it's hard to see why investors would get excited about adding Albertson's to their shopping cart
