Nobody ever said the grocery business was easy. While battling slim margins, rising costs and cutthroat competition — even from Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) — supermarkets must find new ways to drive earnings. And the chains that do the best job of crafting a balance between price wars and upscale offerings are likely to win the day.
That job was tough enough when major grocery chains like Safeway (NYSE:SWY), Kroger (NYSE:KR), Supervalu (NYSE:SVU), Winn-Dixie (NYSE:WINN), Harris Teeter (NYSE:RDK) and Whole Foods (Nasdaq:WFMI) only competed with one another.
Add to that the factors that challenge the entire sector: higher gas prices that are eating into consumers’ wallets and grocers’ margins, significant unemployment and increased competition from wholesalers like Costco (Nasdaq:COST) and Dollar General (NYSE:DG).
Still, the grocery sector is a good place to find names that play to a conservative investment strategy. Here’s why: their earnings and stock prices usually are predictable and even though growth rates end to be comparatively lower, supermarkets are pretty safe bets that pay dividends.
Here are three stocks that are worth a look:
Safeway: This chain has gotten a bad rap from analysts lately – Jefferies & Co. cut the grocer’s rating last week over concerns about the impact of higher gas prices and inflation on consumer spending. Still, Safeway’s quarterly identical-store sales increased very slightly, and that was a reversal of several negative quarters. The dividend yield is 2%, and the stock hit a new 52-week high of $25.37 last week.
Secret Weapon: Safeway’s Lifestyle stores, which offer broader nutritional information, Starbucks (NASDAQ:SBUX) kiosks and gourmet perks like olive and sushi bars represent an opportunity. The Lifestyle brand has significantly boosted volume and the company is gearing up to add another 56 new or remodeled Lifestyle stores.
Kroger: Being the biggest player on the field has its advantages. Kroger CEO David Dillon last week said his company was on track to achieve sales growth in the range of 3%-4% for the rest of 2011. Even though Dillon sees inflation beginning to emerge in non-perishable items, he believes the chain is well-positioned to pass along higher costs without losing customers. Kroger’s dividend yield is 1.7%, and the stock hit a new 52-week high of $24.93 on April 14.
Secret Weapon: Top-flight management is a big differentiator for Kroger — the team has earned a reputation of managing its capital to boost shareholder returns and its customer-centric focus has created deep-rooted customer loyalty. That’s a big deal because Kroger doesn’t depend on pricing alone to drive traffic.
Whole Foods: Shares took a significant hit last week when an analyst said a survey by OTR Global found eight of 23 Whole Foods suppliers reporting lower order volume over the past three to four weeks. That indicates some of the stock’s positive momentum may be falling off. The company, which reports earnings on Wednesday, has seen its shares grow by more than 70% over the past year. Its dividend yield is lower than most competitors at 0.6%.
Secret Weapon: Although Whole Foods is seeing increased competition from other grocers in the organic and environmentally friendly product niche, it‘s still one of the greenest trees in the forest — FreshMarket (Nasdaq:TFM) is its closest competitor. And Whole Foods is expanding that branding with last week’s launch of its Eco-Scale Rating System – a tiered set of green cleaning product standards.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
