Supermarkets can pass cost increases to consumers.
Besides energy, consumer staples is the best performing sector in the stock market over the past year. While it’s only up about 5%, that’s much better than the S&P 500’s 16% slump during the same period. While investors worry about a potential recession triggered by the Federal Reserve’s war on inflation, they’re flocking to defensive stocks like consumer staples. After all, people are going to need food and toilet paper regardless of economic conditions. Plus, grocery stores have some leeway when it comes to pushing price increases through to customers — a handy trait during times of food inflation sparked by drought in the western U.S., an Indian grain export ban and the war in Ukraine. Also, in a recession, people are more likely to cook at home than eat at restaurants. Within the consumer staples sector, food staples retailers are up 2.6% over the past year as of Nov. 21. Here’s a look at seven grocery store stocks to consider as relatively safe buys during a general market downturn.
Walmart Inc. (ticker: WMT)
If a recession hits, Walmart is a grocery store chain that has a particular advantage, as its scale allows it to get great deals when purchasing from suppliers and then pass those savings on to consumers. “For Walmart, it is also well positioned due to it being a defensive play, while it may also benefit from customers trading down due to soaring prices,” says Sam Boughedda, senior stock market analyst at AskTraders.com. WMT is one of the largest companies in the world. Known for its low prices, its stores sell everything from groceries, household items, and health and beauty products to clothing, shoes and electronics.
BJ’s Wholesale Club Holdings Inc. (BJ)
“At this moment in time, we prefer grocery stocks with lower-priced goods due to the current macroeconomic environment,” Boughedda says. “They will continue to remain resilient as customers trade down, with demand at more expensive grocery stores easing in the near term.” In addition to favoring Walmart, this dynamic is also good for BJ’s. As an operator of membership warehouse clubs, BJ’s competes with Walmart-owned Sam’s Club. BJ’s also sells pet goods, electronics, furniture, computers and other products. “For BJ’s wholesale, we see room for growth in the company while it is well positioned in the current economic environment,” Boughedda says.
Target Corp. (TGT)
Like Walmart and BJ’s, Target also sells a wide variety of items in addition to groceries. Items that are more discretionary than food and beverages could dampen overall sales if consumers become more price conscious in the event of a recession. At the same time, megachains like Target have a robust online presence that allows them to sell directly to customers. That gives them a leg up that smaller grocers may not have, especially after the pandemic accelerated consumer trends toward home delivery.
Kroger Co. (KR)
Last month, Kroger said it plans to buy Albertsons Cos. Inc. (ACI) for $24.6 billion in a marriage of the first- and second-largest supermarket chains in the U.S. The deal would give the combined company an expanded network of stores and distribution centers and a broader supplier base for nearly 5,000 stores, 4,000 pharmacies and more than 2,000 fuel centers. “A dominant position among the nation’s largest grocery retailers enables the Kroger Co. to boost market share with the expansion of plant-based products, digital coupons, order online pick up in-store and smart shopping lists,” says Zacks Investment Research.
Companhia Brasileira de Distribuicao SA (CBD)
Zacks Investment Research ranks this Brazilian food retailer highly, as it “is gaining on its digital transformation efforts in the face of consumers’ increased preference for online shopping.” The company has several delivery models, including same-day delivery, and it has a focus on store expansion, according to Zacks. In addition to food, CBD also sells clothing, appliances and electronics. Headquartered in Sao Paulo, CBD’s food retail segment sells to individual consumers. Meanwhile, its cash-and-carry segment sells to resellers, intermediate consumers and retail customers through the Assaí banner.
Costco Wholesale Corp. (COST)
Like Walmart and BJ’s, Costco runs members-only discount warehouse stores that sell groceries and many other products, including electronics, appliances and auto supplies. The company also sells its products and services through its website, where many items can be purchased without a membership but may be subject to surcharges. Earlier this month, Costco reported net sales for October of $17.7 billion, up 7.7% year over year. According to investing research website TipRanks, the average price expectation among 19 analysts offering 12-month price targets is $552.47, representing a 5.6% gain from the Nov. 21 closing price of $523.37.
Grocery Outlet Holding Corp. (GO)
This company operates retail stores in the U.S. and offers name-brand consumables and fresh products through a network of independently operated stores. In its third-quarter earnings report, GO said its comparable store sales rose by 15.4%, while adjusted net income increased by 14.2%. for the increase in comparable store sales to 11% from 8% to 8.5% previously and its forecast for net sales to $3.55 billion from $3.46 billion to $3.48 billion. “I’m extremely pleased with the results we delivered and the continued momentum in our business, especially the uptick in transaction count,” CEO Eric Lindberg said in a press release accompanying the results. “Our value offering is clearly resonating with an increasing number of families looking for ways to stretch their dollar to offset the impact of inflation on their lives.”
7 of the best grocery stocks to buy now:
— Walmart Inc. (WMT)
— BJ’s Wholesale Club Holdings Inc. (BJ)
— Target Corp. (TGT)
— Kroger Co. (KR)
— Companhia Brasileira de Distribuicao SA (CBD)
— Costco Wholesale Corp. (COST)
— Grocery Outlet Holding Corp. (GO)
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Update 11/22/22: This story was previously published at an earlier date and has been updated with new information.