Kroger Co. was upgraded to neutral from underperform at Bank of America, but analysts say food retailers face myriad challenges in 2022, including inflation and supply chain problems.
Analysts raised Kroger’s price objective to $52 from $38.
Kroger KR, +0.46% is one of the food retailers that BofA analysts expect will benefit from digital developments that emphasize ease for consumers. Others include Target Corp. TGT, +3.07%, Bank of America’s top choice in the category, Walmart Inc. WMT, +1.65%, Costco Wholesale Corp. COST, +0.89% and Albertsons Cos. Inc. ACI, -2.23%, but those companies are all rated buy at BofA.
But analysts note that Walmart, Target and others have seen traffic rebound while Kroger has not.
“While we believe Kroger’s strong omni-channel positioning should support market share gains and profitability long term (given alternate profit stream opportunities like digital advertising) – we think valuation upside could be limited as Kroger’s store traffic remains negative,” Bank of America wrote in a note.
“We also think industry challenges from labor, supply chain & inflation (costs & retail) could spill over into 2022, while tough fuel profitability compares & Ocado buildout costs could additionally pressure margins. However, we note that strong profitability from administering COVID vaccines (~10 million shots so far) should continue to support higher pharmacy margins into early 2022.”
Grocers are expected to feel the impact as stimulus cash disappears and changes take hold in the U.S. population.
“Shoppers are seeking more variety (including more general merchandise options) when they shop as millennial household formation, signs of a potential baby boom and ‘the Great Resignation’ have accelerated since the pre-COVID period, supporting our ‘Discount Store Decade’ thesis while potentially encouraging negative store traffic trends at smaller-format grocers and dollar stores,” analysts said.
Smaller grocers with fewer digital capabilities and a smaller selection are expected to suffer more as the year unfolds.
Bank of America analysts downgraded Grocery Outlet Holding Corp. GO, -1.43% to underperform from neutral and lowered their price objective to $23 from $26.
“We see risk to Grocery Outlet’s same-store sales outlook as we believe trip consolidation through COVID that has favored food retailers with broader assortments […] will likely continue in 2022 and pressure Grocery Outlet’s
potential for a recovery in traffic (which was still negative as of 3Q21),” analysts wrote in a separate note.
“While Grocery Outlet began piloting same-day delivery through Instacart in 2021 (in 68 stores in California as of 3Q), we believe Grocery Outlet’s treasure hunt model makes the implementation of e-commerce difficult on a large scale. This means Grocery Outlet also lacks the ability to unlock alternative profit stream
opportunities (like digital advertising) made possible through a first-party digital platform.”
Kroger stock has soared 45.6% over the last year. Grocery Outlet shares have slumped 34.1%. And the S&P 500 index SPX, +0.33% is up 20.2% for the period.