Inflation is still working its way through the economy, yet food prices are outpacing inflation. In July, consumer prices rose 3.2% compared to the previous year, which was slightly below the 3.3% projected. The Core CPI increased 4.7% year over year and saw a 0.2% incremental rise from the previous month. However, food prices in July rose by 4.9% versus last year, including a slight increase of 0.2% compared to June.
Grocery stores are the primary source of goods for most areas, large cities and small towns alike, providing a centralized location where people can access a wide variety of food and essential products. The Federal Reserve is likely to keep raising interest rates, and while the economy may slow in other areas, people still buy food. That means they still shop at the grocery store.
Albertsons Companies Inc. (ACI, Financial) and Kroger Inc. (KR, Financial) want to link up and form a single grocery store giant to rival Walmart Inc. (WMT, Financial). However, Albertsons’ stock price remains undervalued, giving investors a really tasty opportunity.
About Albertsons
Albertsons is one of the largest food and drug retailers in the U.S. with a strong local presence and national scale. Founded by Joe Albertson in 1939 in Boise, Idaho, the company has grown over the decades through a combination of organic growth and acquisitions.
The company operates multiple well-known grocery store chains in addition to the flagship Albertsons brand. Some of these chains include Vons, Jewel-Osco, Shaw's, Acme, Randalls, United Supermarkets, Carrs and Safeway in 2015, which expanded its footprint considerably.
Grocery stores are the staple of life in urban and rural areas alike. They offer a variety of products, ranging from fresh produce, meats and dairy to general grocery and pharmacy items. Many locations also feature in-house bakeries, delis and floral departments. More importantly, Albertsons also has a significant private label presence, offering a wide range of products under its store brands.
The company has also been improving its digital capabilities, responding to a shift in consumer preferences for online grocery shopping. It has launched and expanded services like home delivery, drive-up and go (curbside pickup) and online ordering.
How it makes money
Retail sales makes up the bulk of Albertsons' revenue and includes sales of groceries, general merchandise, health and beauty products, pharmacy items, fuel, etc. at its store locations. Retail sales accounted for over 90% of total revenue in 2022. The company also operates pharmacies within many of its stores. Pharmacy sales represent prescription medication sales and related services, which accounted for around 5% of total revenue.
Like Kroger, some of the company stores (across brands) have fuel stations where customers can purchase gas. Fuel sales made up 1% to 2% of revenue, but is a driver for in-store shopping and customer loyalty to a small degree. Real estate revenue, third-party delivery fees (a small but growing portion of revenue) and other ancillary businesses round out the results.
About the deal
The Kroger-Albertsons merger would combine the nation’s two largest supermarket retailers to create a company with north of $210 billion in revenue across nearly 5,000 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centers, which are served by 710,000 workers in 48 states and the District of Columbia.
The Kroger and Albertsons deal is expected to close in early 2024, but analysts and other industry observers have stated that antitrust approval will likely take longer on such a large transaction and could last as long as two years. There are plenty of competitors in this market, so there’s no reason for the deal to fail in my opinion. Walmart dwarfs the other grocers by market share, but the combination of Kroger and Albertsons would push the company’s share into the same ballpark and well ahead of Publix, HEB and Whole Foods.
With the time it might take, investors have an opportunity to load up on the stock. If the deal is not allowed to move forward to completion, shares in Albertsons could still move higher based on financial results and valuation.
Albertsons is undervalued
With earnings expectations of $3 per share and growing into the next decade, coupled with a stock price traded at less than $22 currently, the deal does not need to go through for the company to become more valuable for shareholders. Albertsons carries around $7.3 billion in long-term debt and another $5.9 billion in capital leases. However, it generates upwards of $3 billion in cash from operations within a business that is a basic necessity to our daily lives. Grocery stores are not going anywhere and thanks to private labelling have been able to improve profit margins over the years.
Albertsons first quarter (ended June 17) demonstrated its ability to navigate well amid an intensifying competitive landscape, but again people have to buy groceries and no company (not even the Whole Foods or Trader Joe's) has complete brand loyalty. First-quarter revenue lifted 3% year over year, driven by same-store sales growth of 4.9%, helped by a 22% increase in online revenue.
Analysts expect revenue to grow at a sustainable 2% per year. That would put total sales in the $90 billion range by 2030. Under similar profit margins as today, that would put the earnings per share around $3 with a forward price multiple of 7 times earnings. That seems like a bargain price for a leader in an industry that is critical to the successful functioning of our society.
