Despite the economic turmoil, retail sales remained stable, indicating that consumer spending is not slowing down. While other sectors continue to be affected by interest rate hikes, the grocery/big box retail sector is holding up thanks to inelastic demand for its products. Investors should therefore not hesitate to buy shares of fundamentally strong big-box retailers, Walmart (WMT), Sprouts Farmers Market (SFM) and Ingles Markets (IMKTA). Keep reading.
The chain stores sector is well positioned to experience significant growth despite macroeconomic challenges, thanks to inelastic demand for their products. Given the defensive nature of the industry, investors should look to fundamentally strong stocks, Walmart Inc. (WMT), Sprouts Farmers Market, Inc. (SFM) and Ingles Markets, Incorporated (IMKTA).
Despite the Fed’s continued efforts to fight inflation, it has remained stubbornly high. A tight labor market and inflation above the Fed’s 2% target reinforce the case for more rate hikes in the near term. In addition, the latest Personal Consumption Expenditures (PCE) report shows that inflation rose more than expected in January, suggesting that the Fed is far from meeting its target.
While high inflation is a major concern for the retail industry, rising prices usually don’t deter consumers from spending on essentials. As a result, consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.8% in January, the largest increase since March 2021.
Over the past year, the chain store industry has faced several hurdles, including supply chain constraints, high inflation and rising interest rates. Last month, however, the Department of Commerce reported that retail sales increased 3% sequentially, while supermarkets experienced steady growth.
In addition, buoyed by the release of January’s blockbuster employment report, consumer spending is likely to remain resilient. This bodes well for the supermarket/big box industry.
Quality wholesale stocks WMT, SFM and IMKTA should benefit from industry winds. So investors should not hesitate to add these stocks to their portfolios this year.
Walmart Inc. (WMT)
WMT offers a range of goods and services at everyday low prices in both stores and e-commerce websites. The company operates in three segments: Walmart US; Walmart International; and Sam’s Club.
On February 21, the company increased its annual dividend by 2% to $2.28 per share, marking its 50th consecutive year of dividend increases. WMT’s four-year average dividend yield is 1.67% and its $2.28 annual dividend yields 1.62% at current prices. The dividend has increased at a CAGR of 1.9% over the past three and five years.
On January 12, Walmart Commerce Technologies and Walmart GoLocal announced a partnership with Salesforce.com Inc. (CRM) to provide retailers with tools and services that enable hassle-free local pickup and delivery for customers around the world. Through this collaboration, WMT can be more measurable for customers.
WMT’s total revenue increased 7.3% year over year to $164.05 billion in the fourth ended January 31, 2023. Adjusted operating income grew 6.3% from a year ago value to $6. 37 billion, while adjusted earnings per share came in at $1.71, representing an 11.8% year-over-year increase. Also, the company’s attributable net income was $6.28 billion, up 76.2% year-over-year.
Analysts expect WMT’s revenue for the quarter ending April 2023 to reach $147.26 billion, representing 5% year-over-year growth. Earnings per share are expected to grow at 3.7% per annum over the next five years. The company beat consensus revenue estimates in each of the next four quarters.
The stock is up 12.9% over the past nine months to close out its last trading session at $139.25.
WMT’s POWR ratings reflect this promising outlook. The stock has an overall rating of A, which translates to a strong buy in our proprietary rating system. The POWR Ratings rate stocks on 118 different factors, each with its own weighting.
WMT also has an A rating for stability and a B for growth, value, sentiment and quality. Out of 38 stocks in the A-rated Grocery/Big Box Retailers industry, it ranks #3. Click here to see WMT’s rating for Momentum.
Sprouts Farmers Market, Inc. (SFM)
SFM is a specialty store of fresh, natural and organic food products. It sells various products divided into perishable and non-perishable categories, such as fresh produce, vitamins and supplements, grocery, meat and seafood, bakery, dairy, body care, and natural household items.
On November 2, 2022, SFM expanded its on-demand grocery delivery through a partnership agreement with DoorDash Inc. (DASH) in select cities, starting with Phoenix, Arizona. This strategic move expands the company’s footprint by giving more people access to fresh produce, increasing the company’s overall revenue.
In the fourth quarter ending January 1, 2023, SFM’s net sales increased 5.6% year over year to $1.58 billion. Gross profit came in at $572.81 million, up 7.4% year-over-year.
The company’s operating income grew 20.4% year over year to $61.87 million, while net income increased 24.5% year over year to $45.12 million. Also, earnings per share were $0.42, up 31.3% year-over-year.
The earnings-per-share consensus estimate of $0.85 for the first quarter (ended March 31, 2023) represents a 7.4% year-over-year increase. The consensus revenue estimate of $1.72 billion for the current quarter indicates an increase of 4.7% over the same period last year. The company has an excellent history of earnings surprises, as it beat consensus earnings per share estimates in each of the next four quarters.
Shares of SFM are up 22.7% over the past nine months to close out the last trading session at $33.14.
SFM’s strong fundamentals are reflected in its POWR ratings. The stock has an overall rating of B, which is equivalent to buy in our proprietary rating system. It has an A grade for quality. In the same industry, it is ranked number 20 out of 38 stocks.
In addition to the POWR ratings I just highlighted, you can check out the SFM ratings for growth, value, momentum, stability, and sentiment here.
Ingles Markets, Incorporated (IMKTA)
IMKTA operates a chain of supermarkets that offers food products, including groceries, meat and dairy products, produce, frozen foods, and other perishables, and non-food products, including fuel centers, pharmacies, and health and beauty products, general merchandise, and private label items.
For the fiscal first quarter ended December 24, 2022, IMKTA’s net sales increased 7.3% year over year to $1.49 billion. Gross profit increased 5.9% from a year ago to $371.16 million, while net income increased 4.8% year over year to $69.37 million.
The company’s earnings per share for Class A and Class B common stock were $3.65 and $3.40 compared to last year’s quarterly values of $3.48 and $3.24, respectively.
Street expects IMKTA’s fiscal year 2024 revenues to grow 3% year over year to $4.84 billion. Earnings per share are estimated to grow at 14.5% per annum over the next five years. Over the past six months, the stock has moved up slightly to close its last day of trading at $91.82.
IMKTA’s solid outlook is reflected in the POWR ratings. The stock has an overall A rating, which equates to a strong buy in our proprietary rating system.
It also has an A rating for value and a B for stability and quality. Within the same industry with an A rating, it is number 2 out of 38 stocks.
Click here to see IMKTA’s additional assessments (Growth, Sentiment, and Momentum).
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WMT Shares. Year-to-date, WMT is down -1.79%, versus a 4.14% increase in the benchmark S&P 500 index over the same period.
About the author: Shweta Kumari
Shweta’s keen interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make informed investment decisions.
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