BEAR MARKET TESTS STOCKS IN RETAIL FOOD SECTOR

The shares of supermarket companies and mass merchandisers took a beating along with many other blue chip stocks during last week's market decline.The Standard & Poor's 500 closed late last week at 1,117.58, having lost more than a quarter of its value since peaking at 1,527.46 a year ago."You used to think [supermarkets] were the safe place to be, but currently nearly all the stocks are down," said

The shares of supermarket companies and mass merchandisers took a beating along with many other blue chip stocks during last week's market decline.

The Standard & Poor's 500 closed late last week at 1,117.58, having lost more than a quarter of its value since peaking at 1,527.46 a year ago.

"You used to think [supermarkets] were the safe place to be, but currently nearly all the stocks are down," said Jack Russo, analyst with A.G. Edwards & Sons, St. Louis, last week.

Doug Christopher, an analyst with Crowell Weedon in Los Angeles, said only a few retail food stocks would provide protection for investors. He noted that even though all stocks are going to take a hit in this period, Safeway and the mass merchandisers like Wal-Mart and Costco will remain a safer defensive bet.

"The state of the economy is going to affect nearly everyone, but Safeway and Wal-Mart are in our opinion the best defensive [stocks]. Investors are going to have to take a look at their portfolios and form a back-to-basics strategy that includes some strongly focused stocks like Safeway. And Safeway, Wal-Mart and Costco all have prices that are optimum for investors entering the sector," Christopher said.

Matt Ferko, analyst with VBS Warburg, Stamford, Conn., said investors should be guided by company, not sector, performance.

"Investors must be company-specific when looking at supermarket stocks," he said. "They shouldn't generalize and think all supermarkets are going to hold their place. But there are some good investments in the sector.

"For example, Pathmark, once it emerged from bankruptcy, went from 11 to 18, and is now holding up well at around 16," although he noted that trading in the company is not very active.

"In this volatile time, people may flock to the sector, and with a little research, they can see who the winners and losers are going to be. They can't just buy across the board." Scott Van Winkle, an analyst with Adams, Harkness & Hill, Boston, said the impact of falling share prices on the supermarket industry in general is going to be slight.

"During an economic downturn, everyone's impacted, even supermarkets," he said. "That's just the facts. People do still have to eat, and they will not necessarily spend much less. They will probably make their food dollars go farther, and they will waste less. "Consumers may still spend $100 a week in a supermarket, but buy fewer gourmet items and more staple grocery items than they have before."

Chuck Cerankosky, analyst with McDonald Investments, Cleveland, said no stock is a safe harbor right now, as investors cash out their mutual funds in a panic. He did, however, say that in the long run these drops in stock prices may be a benefit.

"The best managed chains are going to continue to exhibit growth, and we feel a lot of these stocks are undervalued. As stock prices fall, they become increasingly attractive to investors. Investors are going to start looking for the defensive stocks, and with well-run companies, including food retailers. They're going to find them, buy them and the market will gradually recover," Cerankosky told SN.

Whether this back-to-basics approach will affect the sale of organic and other natural foods is hard to say, analysts told SN. The country's two leading chains of natural food supermarkets, Wild Oats and Whole Foods, both experienced a drop in share price last week and are considerably off their 52-week highs.

But it is hard to judge the affect of a softening economy on these stocks, according to Russo. "It logically seems right on the money to say that these high-price chains will suffer, but loyalty hasn't been tested at these stores since they were not really in the public eye during the last economic downturn several years ago, so we'll have to wait and see."

Van Winkle said he expects the organic market to grow even if the country experiences an economic downturn.

"Whole Foods had a disappointing last quarter, but I expect the sector to grow 10% over the year," he told SN. "The market conditions should offer no significant impact on these retailers.

"Natural food shoppers are not going to trade down as an economic issue, but these stores are at risk of losing some of the gourmet shopper sales, who aren't buying as a matter of health."

Van Winkle also noted that though Wild Oats' stock has been declining, the company has bright prospects.

"Wild Oats was getting beaten where it directly competed with Whole Foods," he said, "but its new stores are excellent, and they are closing some underperforming stores and are going to bounce back."

Christopher voiced a similar opinion. He said the organic and health food business is a "secular" and not cyclical market, and that it derives its strength from a long-term change in the way people feel toward healthy living.

"These retailers are positioned uniquely where they have the atmosphere and services that ensure customers coming in during good and bad times," he said. "The growth outlook and same-store sales will offset the fallout in the market.

"Also, their core customer base probably will not be concerned with the economy or stock market all that much. Organic and health retailers have a high level of customer loyalty and great locations on the whole, and this will see them through."