March’s Consumer Price Index (CPI) report revealed that inflation continues to ease. The CPI rose 0.1% for the month and 5% annually, marking its slowest annual increase since May 2021. Despite the progress in bringing inflation down, it remains above the Fed’s target. The Fed will likely go ahead with further rate hikes this year, fuelling the chances of a recession later this year.
Grocery stocks perform well during economic uncertainty as groceries fall under non-discretionary expenditure. In addition, grocery retail companies are benefiting from the high demand for clean eating. To that end, it could be wise to take a look at grocery giants BJ's Wholesale Club Holdings, Inc. (BJ), Sprouts Farmers Market, Inc. (SFM), and Natural Grocers by Vitamin Cottage, Inc. (NGVC).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the clean-eating trend is picking up.
According to Statista Consumer Insights, there is an emerging demand for healthy food options, as 50% of Americans claim to actively try to eat healthy. Also, the pandemic led many people to focus more on their health and wellness, prompting them to eat more healthily, consume immune-boosting foods, and avoid processed or high-fat foods.
This change in eating habits is more evident in the younger generation, who are willing to spend more on high-quality, healthier food items. With consumers becoming increasingly aware of where their food originates, retailers are investing in technologies promoting health and safety to build consumer trust and brand loyalty.
As more consumers seek healthier food options, retail companies offering clean eating products are witnessing increased sales. The growing demand for clean eating is driving grocery retail companies to introduce new products on their shelves. The global organic food and beverages market is expected to expand at a CAGR of 13.1% to reach $446.36 billion by 2028.
Given these factors, investors could benefit from fundamentally strong grocery stocks BJ, SFM, and NGVC.
BJ's Wholesale Club Holdings, Inc. (BJ)
BJ operates warehouse clubs on the eastern half of the United States. It provides perishable, general merchandise, gasoline, coupon books, promotions, and other ancillary services.
On March 14, 2023, BJ announced its partnership with Simbe to roll out Tally’s business intelligence solution to all club locations across the company’s footprint. BJ’s Executive Vice President and Chief Operations Officer, Jeff Desroches, stated, "We are excited to collaborate with Simbe to bring their industry-leading technology and platform to our clubs.
“By deploying Tally in all of our club locations, we will gain unprecedented insights which will leverage real-time data, enabling us to continuously improve our operation and ensure that we’re offering the best possible experience to both our team members and members,” he added.
On March 9, 2023, BJ announced the addition of five clubs to its existing portfolio in the United States. The additions will increase BJ’s footprint to 20 states and will help increase its revenues.
In terms of forward EV/Sales, BJ’s 0.64x is 62.7% lower than the industry average of 1.73x. Its 0.50x forward Price/Sales is 56.7% lower than the industry average of 1.15x. Likewise, its 19.69x forward GAAP P/E is 4.7% lower than the 20.67x industry average.
For the fiscal fourth quarter that ended January 28, 2023, BJ’s total revenues increased 13.1% year-over-year to $4.93 billion. Its adjusted net income increased 24.4% year-over-year to $136.69 million. The company’s adjusted EBITDA increased 18.7% year-over-year to $271.33 million. Moreover, its adjusted EPS came in at $1, representing a 25% increase from the year-ago period.
BJ’s EPS for the quarter ending July 31, 2023, is expected to increase marginally year-over-year to $1.07. Its revenue for the quarter ending April 30, 2023, is expected to increase 7.8% year-over-year to $4.85 billion. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 17.2% year-to-date to close the last trading session at $77.51.
BJ’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the A-rated Grocery/Big Box Retailers industry, it is ranked #19 out of 37 stocks. The stock has a B grade for Value. Click here to access the POWR Ratings of BJ for Growth, Momentum, Stability, Sentiment, and Quality.
Sprouts Farmers Market, Inc. (SFM)
SFM offers fresh, natural, and organic food products. It offers perishable product categories, such as fresh produce, meat, and seafood, and non-perishable product categories, including grocery, vitamins and supplements, and frozen foods.
On April 18, 2023, SFM partnered with Ancient Nutrition on its R.A.N.C.H. Project. The R.A.N.C.H. (Regenerative - Agriculture - Nutrition - Climate - Health) Project operates Regenerative Organic Certified® farms in Tennessee and Missouri.
Through this partnership, the two companies are not just contributing to a circular economy but are also working to regenerate the quality and nutrient value of depleted topsoil.
SFM’s president and chief operating officer, Nick Konat, said, “Together, we can further the movement in regenerative agriculture, working diligently to create a lasting impact on our future, both environmentally and economically.”
In terms of forward non-GAAP P/E, SFM’s 13.27x is 31.2% lower than the 19.27x industry average. Its 9.49x forward EV/EBITDA is 22.1% lower than the 12.19x industry average. Likewise, its 0.70x forward EV/Sales is 59.6% lower than the 1.73x industry average.
SFM’s net sales for the fiscal fourth quarter ended January 1, 2023, increased 5.6% year-over-year to $1.58 billion. Its net income increased 24.5% year-over-year to $45.12 million. Additionally, its net EPS came in at $0.42, representing a 31.3% increase from the prior-year quarter. Also, its adjusted EBITDA rose 12.6% over the prior-year quarter to $92.88 million.
SFM’s EPS and revenue for the quarter that ended March 31, 2023, are expected to increase 7.1% and 4.7% year-over-year to $0.85 and $1.72 billion, respectively. It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 22.3% to close the last trading session at $33.11.
SFM’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. It is ranked #25 in the same industry. Also, it has an A grade for Quality.
Click here to see the additional POWR Ratings of SFM for Growth, Value, Momentum, Stability, and Sentiment.
Natural Grocers by Vitamin Cottage, Inc. (NGVC)
NGVC retails natural and organic groceries and dietary supplements in the United States. The company's stores offer natural and organic grocery products, bulk food products, and private label products, among others.
In terms of forward non-GAAP P/E, NGVC’s 13.69x is 29% lower than the 19.27x industry average. Likewise, its 10.50x forward EV/EBITDA is 13.8% lower than the 12.19x industry average.
NGVC’s net sales for the first quarter ended December 31, 2022, increased 1.1% year-over-year to $280.46 million. Its net cash provided by operating activities increased 75.9% year-over-year to $21.21 million. In addition, its EPS came in at $0.19.
Analysts expect NGVC’s revenue for the quarter ended March 31, 2023, to increase 0.8% year-over-year to $274 million. Over the next five years, its EPS is expected to increase 5.1% per annum. Over the past three months, the stock has gained 17.4% to close the last trading session at $11.09.
NGVC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #12 in the Grocery/Big Box Retailers industry. It has an A grade for Stability and a B for Value and Quality. We have also given NGVC grades for Growth, Momentum, and Sentiment. Get all NGVC Ratings here.
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BJ shares were trading at $78.03 per share on Monday morning, up $0.52 (+0.67%). Year-to-date, BJ has gained 17.94%, versus a 7.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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