What's Wrong With These Supermarket Stocks? KR, SFM & WFM

Major grocery chains such as The Kroger Co. (NYSE:KR) , Whole Foods Market, Inc. (NASDAQ:WFM) and Sprouts Farmers Market, Inc. (NASDAQ:SFM) are going through a rough patch. Analysts believe that industry-wide weakness is hurting the margins of these supermarket chains. Stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the headwinds with which these providers of daily need items are grappling.

Share prices of these food store chains have been hit hard recently. Sprouts Farmers Market, Kroger and Whole Foods have plunged roughly 27%, 26% and 15.3% year to date, respectively. Yesterday, Kroger and Whole Foods touched a 52-week low of $30.70 and $28.06, respectively, while the share price of Sprouts Farmers Market is hovering close to its 52-week low of $18.70.

What is Wrong with These Stocks?

Sprouts Farmers Market recently lowered its sales and earnings outlook citing a tough retail environment. The company now expects third-quarter comparable-store sales (comps) to be flat, down from the previous forecast of 3–4% growth. For full-year 2016, the company now predicts earnings in the band of 83–86 cents a share against 92–94 cents projected earlier. Further, the company significantly lowered its comps growth guidance for the year to the range of 1.5–2.5% from the previous forecast of 3.5–4.5%.

On other hand, Whole Foods has been struggling with its dwindling comps. The company saw its comps decline 2.6% in third-quarter fiscal 2016. During the first three weeks of the fourth quarter, comps dropped 2.4%. Comps were down 3% and 1.8% in the second and first quarters of fiscal 2016, respectively, and slid 0.2% in the final quarter of fiscal 2015. Management expects comps to decline of 2.4% during the fourth quarter of fiscal 2016.

Last week, Kroger came up with its second-quarter fiscal 2016 results. The company posted adjusted earnings of 47 cents a share that beat the Zacks Consensus Estimate by a couple of cents, and increased 6.8%. Despite delivering a positive earnings surprise for the eleventh straight quarter, this Cincinnati-based company lowered its fiscal 2016 earnings projection on account of a deflationary environment. The company also trimmed its identical supermarket sales (excluding fuel) growth forecast. (Read: Kroger Q2 Earnings Beat, Revenues Miss; View Slashed)

Bottom Line

The grocery business is highly competitive and fragmented. And as more companies are entering as well as expanding their presence, it is becoming tough for the existing players to retain their market share. Kroger currently carries a Zacks Rank #3 (Hold), while Whole Foods and Sprouts Farmers Market holds Zacks Rank #4 (Sell) and #5 (Strong Sell), respectively.

Market experts believe that short-term investors should shift their focus from grocery stocks at least for the time being and bet their bucks on other lucrative counters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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