Food retail stocks poised for gains in 2018

Food retailers are poised to see significant earnings gains thanks to the recently passed tax legislation, according to analysts, and that could translate into a better performance for publicly traded stocks in the year ahead.

Most North American food retailers and wholesalers tracked by SN saw their stocks lose value in 2017 as investors fretted over competitive pressures from discounters and Amazon-Whole Foods. The declines, perhaps also driven by concerns about the future of brick-and-mortar retailing in general, came despite record-setting performances for the major stock indexes overall.

Bill Kirk, an analyst with RBC Capital Markets, said he believes that many traditional operators will be able to withstand the increasing competitive pressures from the likes of Amazon, Aldi and Lidl, and that investors’ concerns are overblown.

“While we acknowledge the competitive threats Amazon and others pose, we believe the grocery space is fragmented enough for multiple players to gain share,” he said in a recent report.

Citing the expansion of Walmart in the late 1990s and early 2000s, when it rapidly rolled out its low-priced grocery offering throughout the country, Kirk noted that strong supermarket operators such as Kroger Co. were still able to gain share and expand their profit margins.

The threat from Amazon-Whole Foods is much less, he argued, noting that both Amazon and Whole Foods have long been competitors in the grocery market and still have a relatively small share overall.

“This acquisition does not change the U.S. grocery asset base itself, but rather changes the operator,” said Kirk.

He predicted that smaller, local food retailers and distributors are much more likely to suffer the effects of increased competition and potential gross margin pressures from cost inflation than the national and large regional chains.

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