Shopping the Supermarket Sector

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Supermarket stocks have been struggling. Mom and pop stores disappeared, replaced by chains like A&P and Food Lion, in turn replaced by Wal-Mart Supercenters. Consumer Reports did a massive survey involving 24,000 shoppers replying about 52 chains, and while privately held A&P's Pathmark was rated the worst and family held Wegman's the best (I heartily concur), the worst rated publicly held chain was Wal-Mart for its Supercenters. Wal-Mart Stores (NYSE: WMT) may hold 22% share of US grocery purchases, followed by Kroger, Costco and Safeway but customers don't like grocery shopping there, except on price. Supervalu had three of its markets listed in the worst dozen supermarkets: Shaw's at #3 just behind Wal-Mart, then again at #5 with Jewel-Osco, and Acme at #11. Kroger's Ralph's stores in California were named #10 of the worst.

Next worst is Supervalu (NYSE: SVU), no surprise there, as the stock has been toppling like a pyramid of canned peaches from a high of $47 in 2007 to a low of $1.68 on October 15. Since suspension of the dividend there's been no reason to be in the stock except buyout hopes. Move along, show's over, people. Yet in the last 5 trading days Supervalu has almost doubled because Cerberus Capital Management may be buying the company or parts of the company but no matter who buys part or all of it, the trade is over.

Other grocers have suffered in sympathy with Supervalu's stunning decline and maybe unfairly. Safeway (NYSE: SWY) didn't have a single name on the worst list. Safeway has a new digital loyalty program and a 4.2% yield with a payout ratio of 31.% and an 8.86 P/E but its leveraged share repurchase program earned it a negative outlook from Fitch also citing soft sales trends in general in the supermarket sector. The profit margin is 1.29%

The Kroger Co (NYSE: KR) has a 23.71 P/E and a 2.40% yield and reports November 29. Its profit margin is razor thin at .65% and holds $8.16 billion in debt to total cash of 238 million. Why bother with half the yield and more than twice the P/E of Safeway? Kroger is the biggest US supermarket chain but there is little compelling about the name.

But Roundys Parent Company (NYSE: RNDY) with its Pick'n Save at #9 on the worst supermarkets list has a huge yield of 16.6% at this point with a 4.70 P/E. It hit its low of $5.50 last week since the May 8 high at $12.50 The company only debuted in February and headlines from last spring were feverish in their praise for the stock with price targets of $20. Most likely because the market was so starved for fresh meat in the form of IPO's but then it reported its first post-IPO earnings and it has basically been downhill since then. It reports again on November 8.

The traditional supermarket sector is being squeezed like the toilet tissue by high-end Whole Foods Market as well as dollar stores and independent discounters like Aldi. Their margins are tiny and even the economy-size yields are worrisome as to sutainability. The business model is just too difficult. Just don't shop in the supermarket sector.

leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Supervalu. Motley Fool newsletter services recommend Supervalu and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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