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Retailers Gain Traction in 1st Half

Retailers Gain Traction in 1st Half

“The perception among investors late last year was that supermarkets were in perpetual decline, but that perception changed during the first half of this year as comparable-store sales were positive for most companies and margins got a little bit better.” — Scott Mushkin, managing director, Wolfe Research

More competitive pricing and slight improvements in the economy helped propel the industry to slightly better financial results during the first half of the calendar year, industry analysts told SN, and they said they expect those factors to continue to boost results moderately during the second half.

Andrew Wolf, managing director for BB&T Capital Markets, Boston, said the first half produced the industry’s best results in four years “because sales productivity got better and pricing was relatively benign.”

According to Scott Mushkin, managing director for Wolfe Research, New York, financial results were not great, “though they were much better than the marketplace was anticipating.

“The perception among investors late last year was that supermarkets were in perpetual decline, but that perception changed during the first half of this year as comparable-store sales were positive for most companies and margins got a little bit better.”

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Bryan Hunt, managing director for Wells Fargo Securities, Charlotte, N.C., said there were few surprises in the half, “as companies continued to find ways to offer value to consumers — and they did a good job of that.”

Higher taxes early in the year and higher gas prices prompted more people to eat at home rather than dining out, he noted; and more normal weather patterns helped comparisons with results from the warmer-than-usual weather in the previous year’s first half, he added.

According to Chuck Cerankosky, managing director for Northcoast Research, Cleveland, the first half was highlighted by “positive earnings surprises” at Kroger and Whole Foods and evidence that more consumers were beginning to trade up.

“The delineation between price operators like Wal-Mart and the dollar stores and the more conventional supermarkets became clearer during the half as more consumers who were working more hours and had more money to spend moved back to conventional stores to trade up due to the improving economy,” Cerankosky explained.

He said he expects to see similar progress during the second half, “The rest of the year should be a little better, with more trading up likely for the holidays as a larger percentage of people feel they can splurge a bit as the economy continues its slow recovery and as people are more willing to increase their discretionary spending.

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“The only caveat is if the economy is not adding jobs, which would make me less optimistic.”

Mushkin said he anticipates the second half will look very much like the first half. “We continue to see a slow turnaround in the conventional supermarket business, with unemployment rates continuing to go down — always a positive benchmark for improving results among supermarkets.

“The data also indicates some shifts in market share back to traditional supermarkets as more operators move closer to Wal-Mart on price, and that combination of better margins plus consumers who are just a little bit better off makes the balance of the year look pretty good.”

Wolf said he expects second-half results to be about the same as in the first half “unless some crisis shakes consumer confidence. Otherwise, while I don’t expect results to be much better, I also don’t expect them to be any worse because with inflation reasonably low, sales won’t get much of a boost, though the competitive environment should continue to remain relatively benign.”

Bryan Hunt
Bryan Hunt

Hunt said he expects the second half to be similar to the first, with the state of the economy prompting more consumers to eat at home, “meaning share-of-wallet should favor supermarkets.

“The biggest concern is deflation. With inflation slowing down during the second half at the same time supermarkets are being more aggressive on price, the industry is likely to experience some deflation late in the year,” he explained.

Looking at overall financial results during the first half of the calendar year for the top 10 chains with public equity or debt:

• Total sales were relatively flat — down about 1% from the first half of 2012, due largely to increases in the price of gas, analysts noted.

• Comparable-store sales, excluding fuel, rose an average of 2.3% in the first quarter of the year — better than the 1.5% improvement in last year’s first quarter; however, comps in the second quarter rose an average of only 1.1%, compared with gains of 1.3% a year earlier, due primarily to the shift in Easter this year.

• Operating income for the half improved by 7.3% among nine of the companies, excluding Supervalu. (Because of the financial restructuring at Supervalu following the sale of the Albertsons stores last fall, accurate income comparisons on restated numbers were not available.)

Company by Company

Considering financial results for each of the chains individually, analysts made the following comments:

KROGER CO., Cincinnati, whose sales for the half rose 3.9% to $52.8 billion, with comps up 3.3% in both the first and second quarters and operating income up 9.4% to $1.5 million.

Kroger’s ongoing success is based on “years of consistent strategy, including a laser focus on customers that is continuing to pay dividends,” Mushkin said.

“Kroger has been able to neutralize price by staying within 10% of Wal-Mart — and that’s before applying dunnhumby data; plus it has boosted store-level staffing at the same time Wal-Mart has reduced store employees, and it continues doing a great job of merchandising.”

Andrew Wolf
Andrew Wolf

Wolf offered a similar assessment, noting that Kroger’s volume keeps growing due to a combination of keeping prices closer to Wal-Mart’s than other competitors; using data from dunnhumby to help improve its focus; and offering better front-end service, “which is what customers want to see.”

According to Cerankosky, one of Kroger’s strongest assets is its ability to offer the right assortment by neighborhood. “It’s done an extraordinary job doing that, which helps build intense loyalty,” he said. “And because everyone likes to save money on gas, Kroger’s fuel rewards program is also a big factor contributing to its success.”

SAFEWAY, Pleasanton, Calif., which saw sales drop 0.8% to $17.2 billion during the half, while comps rose 1.5% in the first quarter and 1.2% in the second, with operating income dropping 2.6% to $244.3 million following the sale or closure of its 27 Genuardi’s stores in the first half of 2012 and its decision to list Canada as a discontinued operation in the second quarter of this year after its pending sale to Sobeys was announced.

Cerankosky said Safeway was able to gain traction on same-store sales during the half “because of an improved price image, the Just for U program and the chain’s expanded gas rewards program — and given Safeway’s merchandising strategy, sales should continue to progress as the economy improves and consumers continue to trade up.”

Read more: Analysts Positive on Safeway's Chicago Exit

According to Wolf, “Though Safeway’s earnings were down slightly, the trend is improving, with investments in gross margins, especially during the first quarter. “Safeway also benefited from the relatively benign price environment.”

For Mushkin, Safeway’s sales were generally sluggish “as it continued to struggle to find its way toward better operating performance because of legacy issues in execution, merchandising and pricing — issues the new chief executive officer [Robert Edwards, who took over in May] will have to deal with.”

AHOLD USA, Quincy, Mass., whose sales increased 2.9% to $14.2 billion during the half, with comps up 2% in the first quarter and 0.6% in the second and operating income down 1.8% to $584 million — a comparison that reflected an income restatement for the first half of 2012 following the addition of 16 Genuardi’s stores acquired from Safeway.

Ahold was able to strengthen its results because of the slow economic turnaround in most of its operating areas and the weakness of many of its competitors, including A&P, Shaw’s and Hannaford, a European analyst, who asked that his name not be used, told SN.

Read more: SN Analysts Roundtable: Rebuilding the Industry

“Ahold continued to outpace its local peers and took market share from them in all regions, though its Giant Foods segment in the Washington, D.C. , area was the weakest of the company’s four regions because of the economy,” the analyst said.

Ahold was also up against weak comparisons during the first half because of reinvestments in pricing in the prior year, he added.

Wolf said Ahold was able to boost sales by continuing to bring prices down somewhat during the half.

SUPERVALU, Minneapolis, whose retail volume for the first half of the calendar year fell 2.6% to $4.8 billion (on a restated basis following the sale of the Albertsons banners last fall), while comps were down 4.1% at the company’s corporate supermarkets and 2.6% at its Save-A-Lot stores during the distributor’s fiscal fourth quarter and down 3% at the conventional stores and 1.9% at Save-A-Lot during its fiscal first quarter.

Because of the financial restructuring that followed the sale of the Albertsons banners, operating income numbers and comparisons with the prior year were unavailable.

Scott Mushkin
Scott Mushkin

Results at Supervalu for the first half of the calendar year were better than most people had expected, Mushkin said. “Though the company’s fourth quarter was pretty rough, the new management team [that came in last fall] made price investments that improved results and made the comps less negative, with better earnings results than investors had anticipated.”

According to Wolf, Supervalu’s comp sales showed an improving trend “because new management was running the stores better, particularly Save-A-Lot — and the small uptick in the economy also helped.”

Cerankosky said Supervalu did well during the half “because the new executive team got back to the company’s roots as a logistics company and was also able to achieve cost-cutting at the stores, with a new focus on growing sales.”

DELHAIZE AMERICA, Salisbury, N.C., which saw first-half sales increase 1.3% to $8.4 billion, with first quarter comps up 1.9% and second quarter comps up 1.1%, while operating income rose 8.9% to $342 million.

Delhaize benefited during the half from weak comparisons with the prior year, when it was in the midst of re-branding and making heavy price investments at Food Lion, the European analyst pointed out.

Read more: Delhaize Europe CEO Resigns; U.S. CEO Search On

“It’s now in the middle of its turnaround,” he said, “with sales looking a lot better as it begins to reap the benefits of previous price investments.”

According to Wolf, some of the first-half improvements at Delhaize resulted from its ongoing price investment at Food Lion. “Food Lion had lost its way, and the price gap with Wal-Mart had become untenable. But the company spent the better part of last year investing in price in a lot of markets, and it’s been able to stabilize its share in those markets,” he explained.

Whole Foods, Harris Teeter, More

WHOLE FOODS MARKET, Austin, Texas, where sales climbed 12.5% to $6.1 billion for the first half of the calendar year, while comps jumped 8.9% in the chain’s second quarter and 7.5% in the third and operating income rose 20.6% to $456 million.

“It was another stellar performance for Whole Foods,” Mushkin said, “with very solid sales coupled with good margins."

According to Cerankosky, Whole Foods “just keeps cranking out industry-leading comps because it has created itself as a true brand. People go to Whole Foods to buy Whole Foods products that they feel have better quality than the consumer packaged brands. And perishables sales account for more than 60% of the total sales mix, which is 20% above the industry average.

Chuck Cerankosky
Chuck Cerankosky

“What continues to impress is the company’s ability to get an increasing number of new stores open and profitable right on schedule.”

For Wolf, Whole Foods is operating “as good as it ever has” — continuing to maintain its momentum in merchandising and store operations at the same time it’s opened new stores “at an incredibly high level.“

Growing so rapidly usually dilutes the talent at store level, Wolf pointed out, “but I’ve been really impressed with Whole Foods’ ability to ramp up growth without a hiccup — due primarily to its investment in training, which is at a higher level than that of most conventional supermarkets. And because Whole Foods is considered a preferred place to work, it attracts good talent.”

HARRIS TEETER, Matthews, N.C., whose sales rose 1.4% to $2.3 billion for the half, with comps up 3.7% in the company’s second quarter and 1.3% in the third and operating income rising 3.7% to $111.4 million. Kroger Co. is scheduled to complete its acquisition of Harris Teeter by the end of the calendar year.

Cerankosky said Harris Teeter was able to achieve its results despite dealing with the integration of a handful of acquired Lowes stores during the half, “and it put a lot of effort into remodeling those stores, which were generating lower sales than the chain average.”

Read more: Harris Teeter Shareholders OK Kroger Deal

In terms of operating income, Cerankosky said, Harris Teeter continued to benefit from the more upscale demographic it attracts, “which has responded more quickly to the recovery, with the company offering a lot of trade-up opportunities, particularly in prepared foods and perishables.”

STATER BROS., San Bernardino, Calif., with sales up 2.3% to $1.9 billion, comps up 1.4% and 3.2% in the second and third quarters, respectively, and operating income down 10.9% to $59.4 million.

Stater continued to be very value-focused during the half, Hunt said. “It shared the pain of inflation with its customers by passing along some price increases, but operating income was down because the company chose to absorb the gross profit deterioration.

“In one quarter alone Stater took a 90-basis-point hit to gross profit on higher costs and simply absorbed it, and it extended promotional pricing to maintain its customer counts.”

The company also saw seven competitive openings during the half, “but it got more promotional, with more discounts than it usually offers, to maintain its market share, and that hurt profits,” Hunt said.


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ROUNDY’S SUPERMARKETS, Milwaukee, Wis., whose sales declined 1.5% to $1.9 billion, while comps rose 1.3% in the first quarter and dropped 5.8% in the second, while operating income fell 24.2% to $36.3 million — due in part to cost adjustments in the prior year related to the chain’s IPO.

“Roundy’s is being assaulted in the Milwaukee market by Wal-Mart in terms of both price-comparison ads and a lot of new square footage, which has resulted in sales and margin challenges,” Mushkin pointed out.

INGLES MARKETS, Asheville, N.C., which saw sales increase 2.8% to $1.85 billion, with comps rising 2.7% and 1.4% in the second and third quarters, respectively, and operating income up 3.5% to $60.6 million.

“Ingles just keeps doing what it’s been doing,” Hunt said — expanding the food service components of its business and also adding more fuel centers, “which enable it to improve the customer experience along with customer loyalty,” Hunt said.

The chain also held the line on prices, he added.

Read more: Ingles Director Sells Shares

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