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Why Supermarket Stocks Fell in 2016

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Snapshot of the series

The U.S. Food retail sector comprises store formats that range from small grocery shops and convenience stores to large supermarkets and club stores. The supermarket format represents the largest segment of the US food retail industry.

In this series, we discuss the performance of major supermarkets in 2016. We’ll focus on four supermarkets: Kroger (KR), Whole Foods Market (WFM), Sprouts Farmers Market (SFM), and Supervalu (SVU).

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Supermarkets and deflationary woes

2016 was a challenging year for grocers as rising deflation and increasing competition crimped the top and bottom lines of all the key grocers. Stock prices fell drastically, and each of the companies underperformed the broader S&P 500 index. KR, SFM, WFM, and SVU shed 17%, 29%, 8%, and 31% of their stock values in 2016. In comparison, the S&P 500 index jumped 9.5% during the year.

The Consumer Staples Select Sector SPDR Fund (XLP), which invests 23% of its holdings in food and staples retailers, was up 5% during the year.

Valuations

Valuations of most supermarkets took a hit as the companies were punished in the stock markets for their poor financial performance and bleak outlooks.

Sprouts Farmers Market, which traded at a PE ratio 38x in 2015, is currently trading at 21 times the next 12 months’ earnings. The company, although operating towards the lower end of its 52-week PE range continues to be expensive to peers Kroger and Supervalu. Nevertheless, it outshines peers in terms of past financial performance and future earnings potential.

Wall Street Recommendations

Wall Street has a neutral view on most supermarkets. Among the companies discussed above, Sprouts Farmers has received the best rating. It’s rated 2.1 on a scale of 1 (strong buy) to 5 (sell). In comparison, Whole Foods, Supervalu, and Kroger are rated 3.2, 2.2, and 2.6, respectively.

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