Although surprisingly strong retail sales data on Oct. 17 pointed to U.S. economic expansion, the consumer staples sector has seen an overall decline in 2023 as people cut back on spending in the face of higher inflation and market volatility.
That goes double for the grocery industry, with the benchmark iShares U.S. Consumer Staples ETF (ticker: IYK) down 8.2% on a year-to-date basis as of Oct. 17. That’s significantly lower than the S&P 500, which has returned 13.9% so far this year.
There is some good news for the grocery industry, and by extension, consumer staples investors who are looking for “buy the dip” opportunities heading into 2024. The U.S. inflation rate stands at 3.7%, much lower than the 2022 peak rate of 9.1%. The food inflation rate – yes, there is such a metric – was down to 3.7% on an annual basis in September from 4.3% in August, signaling that sky-high grocery prices are coming down in the fourth quarter of 2023 and falling in line with the overall inflation rate.
From a historical lens, it’s also apparent that grocery store revenues have been on a roll over the long haul. Since 1992, U.S. grocery store sales have more than doubled, and total 2022 grocery store sales clocked in at $848.4 billion, according to Statista. That’s a record high for the industry.
If you’re a value-minded investor and are looking for an opportunity to get into a profitable industry on the cheap right now, grocery stocks could be for you.
So let’s hit the aisles to find the best grocery stocks for the remainder of 2023 and for 2024; the consumer staples sector is bringing these prospects to the table for investors right now:
|GROCERY STOCK||FORWARD YIELD||FORWARD P/E||YTD RETURN AS OF OCT. 17|
|Walmart Inc. (WMT)||1.4%||22.7||15.2%|
|BJ’s Wholesale Club Holdings Inc. (BJ)||N/A||17.4||5.1%|
|Target Corp. (TGT)||3.9%||12.3||-22.8%|
|Kroger Co. (KR)||2.6%||10.1||1.5%|
|Companhia Brasileira de Distribuicao SA (CBD)||N/A||N/A||-77.4%|
|Costco Wholesale Corp. (COST)||0.7%||33.9||25.4%|
|Grocery Outlet Holding Corp. (GO)||N/A||23.4||-3.6%|
Walmart Inc. (WMT)
Walmart has outpaced the S&P 500 so far in 2023, returning 15.2% as of Oct. 17. Fitch Ratings expects Walmart’s internally generated cash flow to be “substantial,” with annual free cash flow at an average of $2 billion after capital expenditures of $17 billion and dividends of about $6.5 billion. Rising consumer sentiment and robust holiday sales should drive profits up for the retail giant over the next 12 months, analysts say. In the third quarter of fiscal 2023, global revenue grew 8.7% year over year.
Toss into the mix a 1.4% dividend and Walmart’s well-earned reputation for offering low prices for goods like groceries, household items, health and beauty products, clothing, shoes and electronics, and Walmart stands out at a time when consumers are worried about overpaying for anything. The bargain-shopping leader could face headwinds from even cheaper discount stores in an economic downturn, but Walmart remains the budget-grocery king.
BJ’s Wholesale Club Holdings Inc. (BJ)
This big-box retailer is underperforming in 2023, with its share price up 5.1% on a year-to-date basis. Still, it’s doing better than some of its competitors. And like Walmart, BJ’s historically excels at giving customers what they want with loads of value deals and discounts, and should emerge as a portfolio powerhouse as inflation keeps receding.
The retailer has a relatively small building footprint, with 238 store locations and 7 million members, compared with Costco’s 592 U.S. stores and 127.9 million members. But that means BJ has plenty of room for growth at a time when consumers are embracing big-box store selection and value over high-end grocers.
In the most recent quarter, BJ’s membership fee income increased by 5% year over year to $103.7 million. Digital sales were also up 15% on a year-to-year basis, and club sales excluding gasoline were up 1.1%. Analysts are bullish on the stock, with TD Cowen recently issuing an “outperform” call on BJ’s and an $80 share price target. BJ stock closed at $69.51 on Oct. 17.
Target Corp. (TGT)
Target stock has been off the mark so far in 2023, with shares falling 22.8% as of Oct. 17, but the retailer is showing signs of life this fall. BofA Securities has taken note, shifting from “neutral” to “buy” in an early October research note. Analysts see TGT stock rising from $120 per share to $135, largely due to more foot traffic at stores as consumers emerge from the summer doldrums and as gross margins start to shift toward the positive side of the ledger heading into 2024.
Target has also been aggressive in moving holiday sales to early October, matching similar moves by rivals Walmart and Amazon.com Inc. (AMZN). Total revenue may be down 4.9% to $24.8 billion, but net income was actually up a whopping 356% in the second quarter over the prior-year period. The company’s hefty 3.9% forward dividend yield should also attract income-minded investors, making TGT a very strong play heading into 2024.
Kroger Co. (KR)
Kroger shares are up 1.5% so far in 2023, so the grocery giant is not exactly blowing away the competition. Although it’s usually a fine line when it comes to valuing grocery stores that all operate in a thin-margin business, Kroger seems to have a solid blueprint for revenues and a reputation for nimbleness.
The company’s acquisition of meal-kit company Home Chef and its new partnership with U.K.-based online grocery firm Ocado show Kroger’s growth with its audience of flexibility-minded shoppers. The company also recently rolled out its new Kroger Ship delivery business, which should resonate with its 11 million daily customers, many of whom are growing comfortable with ordering their groceries online.
Kroger’s imminent purchase of Albertsons Cos. Inc. (ACI) for $24.6 billion should expand the grocer’s footprint to more than 5,000 stores in the U.S. and Canada, along with a network of 4,000 pharmacies and more than 2,000 fuel centers. Don’t dwell too much on Kroger’s flat share price right now – as of Oct. 17 its stock price has risen by 80.7% in five years. KR also has a 2.6% dividend yield.
Companhia Brasileira de Distribuicao SA (CBD)
For grocery industry investors who don’t mind looking outside of the U.S. for good share value, Brazil’s Companhia Brasileira de Distribuicao, doing business as GPA, could be a profitable landing spot. Its share price is down a miserable 77.4% so far in 2023, and it’s seen some volatility after its spinoff from supermarket operator Grupo Éxito. The grocery titan has focused on two growth channels in 2023: digital transformation and store expansion. Consolidated gross revenues were up 15.4% in the first quarter, and same-store sales rose 6.3%, excluding gas stations.
GPA is also in major expansion mode, with 78 new stores opened since 2022 and 70 new stores in the pipeline, the company reports. Like Target and Walmart, it not only sells groceries but also clothing, appliances and electronics. Amid a population of 217 million, GPA is in the driver’s seat as its home country’s largest grocery chain. Still, CBD stock is a long-term play with a fair amount of risk.
Costco Wholesale Corp. (COST)
Costco’s tried-and-true business model of running members-only discount warehouse stores that sell groceries and many other products – including electronics, appliances and auto supplies – remains a big hit with consumers. Costco is that rare breed among big grocery chains in 2023 – its share price has soared 25.4% on a year-to-date basis as of Oct. 17.
In late September, Costco issued an encouraging fourth-quarter report with adjusted earnings rising 16%, to $4.86 per share. Net sales were also up 9.4% in the quarter over last year’s comparable period, to $77.4 billion. Investors may want to keep an eye on Costco’s membership fees, which haven’t risen since 2017. But company management has been hinting at a price hike. “(It’s) a question of when, not if,” said Costco Chief Financial Officer Richard Galanti on a recent earnings call. “You’ll see it happen at some point.”
With Costco proving it can make money in tough economic times – net sales rose 6% from September 2022 to September 2023 – the stock should be in play for investors who want the closest to a sure thing they can buy in the grocery sector.
Grocery Outlet Holding Corp. (GO)
This retail grocery store operator’s stock is also down in 2023, but only by 3.6% as of Oct. 17. The company’s stock took off in August, after the GO reported its first-ever $1 billion quarter. In late September, Zacks Research issued a “strong buy” call on GO shares, citing an “upward trend in earnings estimates.”
Grocery Outlet specializes in selling discounted, overstocked and closeout products, which is a solid corner of the retail grocery market in the last quarter of 2023, thanks to customers actively digging for deals. While GO’s discount and overstock sales model doesn’t exactly sound spicy, the company is a proven moneymaker in today’s bargain-hunting market environment.
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