The recent chaos that has followed the acquisition of Whole Foods Market, Inc. (NASDAQ:WFM) by e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) has been remarkable to follow over the past six weeks.
Since announcing the deal mid-June, investors in grocery retail stocks have largely looked away from traditional retailers in favor of opportunities with less overhang from America’s leading disrupting force: AMZN.
Nearly every traditional brick-and-mortar retailer has been devastated by this pending merger due to the fear that AMZN will now be able to execute its automation and efficiency platforms within food retail, something which has long been considered very hard to do due to logistical issues with food products. The fear that Amazon will change the industry is real, and while I believe some of it is warranted, I also believe that much of it may not be warranted. In other words, now may be the best time to go shopping for grocery retail stocks.
After all, someone much wiser than me once said, “the stock market is the only market where people don’t want to shop for things that are on sale.”
In this article I will discuss three companies I believe will be able to weather the storm many believe to be impossible to survive: Supervalu Inc. (NYSE:SVU), Costco Wholesale Corporation (NASDAQ:COST) and Kroger Co (NYSE:KR).
Retail Stocks That Will Survive Amazon’s Grocery Push: SuperValu (SVU)
What matters for investors attempting to place a valuation on the equity portion of a business is the long-term earnings ability of a given company, a key driver of free cash flow generation over time. With the impact of the WFM/AMZN integration not yet fully known, estimates as to how the integration will change long-term assumptions around earnings growth and free cash flow growth will likely vary significantly from analyst to analyst.
One such company which has shown strength despite the recent harsh sell off is Supervalu.
Looking at the recent earnings release of SVU, one of the bricks-and-mortar retailers which has been hit hardest by Amazon’s entrance into this space, we can see that the company has continued to perform very well, posting revenue results which beat analyst expectations and sent SVU’s stock price soaring, increasing more than 10% last Tuesday following the earnings release.
The company posted a revenue increase of 6.3% year-over-year, alongside robust EBITDA numbers and a small, but meaningful profit.
Retail Stocks That Will Survive Amazon’s Grocery Push: Costco (COST)
The most recent earnings reported by Costco were released prior to the pending merger announcement. Although earnings were solid, the direction each firm’s stock price will move in the coming quarters will likely be a reflection of the ability of COST to continue to churn out profits. That’s something I contend they will be very likely to do, as AMZN’s entrance into the grocery retail space is likely to take a significant amount of time and capital investment.
Among the companies I believe will survive the Amazon assault, COST remains my top pick as a grocery retailer with an edge which is unlikely to be supplanted by Amazon: a unique business model and a very loyal consumer base.
Retail Stocks That Will Survive Amazon’s Grocery Push: Kroger (KR)
Kroger may have slightly more risk than the previous two retail giants due to the company’s product mix and customer base, which may be more sensitive to long-term changes in the way consumers seek their products.
However, fundamental metrics underlying customer loyalty remain strong with KR. In addition to posting high satisfaction rates among its customer base, specific KR divisions have performed significantly better than their peers in terms of generating return visits, underscoring the strong performance of KR in a very competitive environment.
With strong customer loyalty and operational success acting as a short-term buffer, it remains clear that retailers such as Kroger will need to continue to enhance their competitive moat further to keep their shoppers walking through their front door, rather than sitting on their couches.
I expect investors will see a number of initiatives from retailers such as KR and SVU in the coming months.
As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.
