Right off the bat, I'll give credit where credit is due -- Albertson's
Results for the first quarter were pretty solid. Sales were up 16% overall, and same-store sales were up 1.8%. Operating profit rose almost 53%, and the margin improved pretty significantly. (When your operating margins are this thin, a 70-basis-point improvement is "significant.")
Elsewhere, the company continues to integrate its acquisition of Shaw's, and the dual-branding strategy for food and drug stores has reached more than 1,000 stores. Albertson's has also continued to roll out additional private-label products, and the company's Internet-based delivery business is well regarded (though just a tiny part of the business today).
Top that off with a healthy dividend yield of about 3.5% and you've got a good turnaround opportunity, right? Well, maybe not.
The situation that Albertson's faces seems to me to be akin to being nibbled to death by ducks. Almost every niche of the food-retailing world seems focused on taking away bits and pieces of the supermarket trade:
(NYSE:WMT)and Target (NYSE:TGT)have built many of their new stores in the "super" format that includes considerable square footage devoted to food.
- Chains like Whole Foods
(NASDAQ:WFMI)and Wild Oats (NASDAQ:OATS)attract shoppers who are more concerned about their health than about their pocketbooks. Smaller high-end specialty and boutique stores draw away even more big spenders.
- Warehouse stores like Wal-Mart's Sam's Club, Costco
(NASDAQ:COST), and BJ's (NYSE:BJ)are extremely competitive on packaged goods and are currently expanding inexorably into fresh meat and produce.
- Pharmacies like Walgreens are not only competitive in the profitable pharmacy segment, but they're also increasingly selling more food products (and at very competitive prices).
There will probably always be a niche for supermarkets, and I'd venture that the mythical "average person" still does most of his or her shopping there, but that niche is under pressure on multiple fronts. At the right price, Albertson's might be an attractive income-focused idea, but I just can't get all that excited about paying a double-digit P/E for a long-term single-digit grower.
Are supermarkets still super?
- United Natural Foods on the Go
- Safeway Slides Into First
- Costco's Positive Indifference
- Has Whole Foods Hit a "Tipping Point"?
Albertson's may not yet make the cut for Mathew Emmert, but there are plenty of stocks that do. Find out more about picking high-quality income plays with a free trial subscription to Motley Fool Income Investor newsletter.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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