Despite the economic turmoil, retail sales remained steady, indicating that consumer spending is not slowing down. While other sectors continue to feel the pinch of interest rate hikes, the grocery/big-box retail industry has been holding up well due to the inelastic demand for its products. Therefore, investors shouldn’t hesitate to buy shares of fundamentally strong big box retailers, Walmart (WMT), Sprouts Farmers Market (SFM), and Ingles Markets (IMKTA). Keep reading.
The big box retailer sector is well positioned to witness significant growth despite the macro issues, thanks to the inelastic demand for their products. Given the industry’s defensive nature, investors should check out fundamentally strong stocks, Walmart Inc. (WMT), Sprouts Farmers Market, Inc. (SFM), and Ingles Markets, Incorporated (IMKTA).
Despite the Fed’s persistent efforts to fight inflation, it has remained stubbornly high. A tight job market and inflation above the Fed’s 2% objective boost the argument for more rate hikes in the near term. Moreover, the latest Personal Consumption Expenditures (PCE) report shows inflation up more than expected in January, which suggests that the Fed is far from achieving its target.
Although high inflation is a major concern for the retail industry, rising prices usually do not deter consumers from spending on essentials. As a result, consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 1.8% in January, marking the largest increase since March 2021.
Over the past year, the big-box retail industry has encountered various hurdles, including supply chain constraints, high inflation, and rising interest rates. However, last month the Commerce Department reported that retail sales increased by 3% sequentially, while the grocery stores witnessed steady growth.
Furthermore, buoyed by the release of January’s blockbuster employment report, consumer spending will likely remain resilient. This bodes well for the grocery/big box retailers’ industry.
Quality big box retailer stocks WMT, SFM, and IMKTA should benefit from the industry tailwinds. Thus, investors shouldn’t hesitate to add these stocks to their portfolios this year.
Walmart Inc. (WMT)
WMT offers an assortment of merchandise and services at everyday low prices in both retail stores and through e-commerce websites. The company operates through three segments: Walmart U.S.; Walmart International; and Sam’s Club.
On February 21, the company increased its annual dividend by 2% to $2.28 per share, marking the 50th consecutive year of dividend increase. WMT’s four-year average dividend yield is 1.67%, and its annual dividend of $2.28 yields 1.62% at current prices. Its dividend has increased at a CAGR of 1.9% over the past three and five years.
On January 12, Walmart Commerce Technologies and Walmart GoLocal announced a collaboration with Salesforce.com Inc. (CRM) to provide retailers with tools and services that enable frictionless local pickup and delivery for customers worldwide. This collaboration will enable WMT to be more assessable to customers.
WMT’s total revenue increased 7.3% year-over-year to $164.05 billion in the fourth ended January 31, 2023. Its adjusted operating income grew 6.3% from the year-ago value to $6.37 billion, while its adjusted EPS came in at $1.71, representing an increase of 11.8% year-over-year. Also, the company’s attributable net income stood at $6.28 billion, up 76.2% year-over-year.
Analysts expect WMT’s revenue for the quarter ending April 2023 to be $147.26 billion, representing 5% year-over-year growth. Its EPS is expected to increase by 3.7% per annum over the next five years. The company surpassed the consensus revenue estimates in each of the trailing four quarters.
The stock has gained 12.9% over the past nine months to close the last trading session at $139.25.
WMT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
WMT also has an A grade for Stability and a B for Growth, Value, Sentiment, and Quality. Among the 38 stocks in the A-rated Grocery/Big Box Retailers industry, it is ranked #3. Click here to see WMT’s rating for Momentum.
Sprouts Farmers Market, Inc. (SFM)
SFM is a specialty retailer of fresh, natural, and organic food products. It sells various products categorized under perishable and non-perishable categories, such as fresh produce, vitamins and supplements, grocery, meat and seafood, bakery, dairy, body care, and natural household items.
On November 2, 2022, SFM expanded its on-demand grocery delivery through a partnership agreement with DoorDash Inc. (DASH) in selected cities, commencing with Phoenix, Arizona. This strategic move extends the company’s footprint by enabling more people to access its fresh produce, thereby boosting the company’s overall revenue.
In the fourth quarter ended January 1, 2023, SFM’s net sales increased 5.6% year-over-year to $1.58 billion. Its gross profit came in at $ 572.81 million, up 7.4% year-over-year.
The company’s income from operations grew 20.4% from the year-ago value to $61.87 million, while its net income increased 24.5% year-over-year to $45.12 million. Also, its EPS stood at $ 0.42, representing an increase of 31.3% year-over-year.
The consensus EPS estimate of $0.85 for the first quarter (ending March 31, 2023) represents a 7.4% increase year-over-year. The consensus revenue estimate of $1.72 billion for the current quarter indicates a 4.7% increase from the same period last year. The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
Shares of SFM have gained 22.7% over the past nine months to close the last trading session at $33.14.
SFM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Quality. In the same industry, it is ranked #20 of 38 stocks.
In addition to the POWR Ratings grades I’ve just highlighted, you can see the SFM ratings for Growth, Value, Momentum, Stability, and Sentiment here.
Ingles Markets, Incorporated (IMKTA)
IMKTA operates a chain of supermarkets that offers food products, including grocery, meat and dairy products, produce, frozen foods, and other perishables, and non-food products, which including fuel centers, pharmacies, and health and beauty care products, general merchandise, and private label items.
For the fiscal first quarter that ended on December 24, 2022, IMKTA’s net sales increased 7.3% year-over-year to $1.49 billion. Its gross profit rose 5.9% from the year-ago value to $371.16 million, while its net income increased 4.8% year-over-year to $69.37 million.
The company’s EPS for Class A and Class B common stock were $3.65 and $3.40 compared with the prior-year quarter values of $3.48 and $3.24, respectively.
Street expects IMKTA’s revenue for the fiscal year 2024 to increase by 3% year-over-year to $4.84 billion. Its EPS is estimated to increase by 14.5% per annum over the next five years. Over the past six months, the stock has gained marginally to close the last trading day at $91.82.
IMKTA’s solid prospects are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
It also has an A grade for Value and a B for Stability and Quality. Within the same A-rated industry, it is ranked #2 of 38 stocks.
Click here to see the additional ratings of IMKTA (Growth, Sentiment, and Momentum).
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WMT shares . Year-to-date, WMT has declined -1.79%, versus a 4.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta’s profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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