As economic pressure builds, consumers predictably curtail non-essential expenditures and primarily focus on necessities. Amid inflation and economic instability, the grocery industry is impervious owing to the essential nature of grocery spending.
Given this backdrop, it is worth underscoring that fundamentally strong grocery stocks DFI Retail Group Holdings Limited (DFIHY), Tesco PLC (TSCDY), and Village Super Market, Inc. (VLGEA) could be solid buys this month.
Before delving into the fundamentals of these stocks, let’s understand the factors driving the grocery industry’s resilience amid uncertain macroeconomic climates.
Retail spending saw a noteworthy 3.4% uptick in September, surpassing August's 2.5% annual growth. American consumers displayed robust spending patterns, greatly aided by the mitigating inflation and a sturdy employment market.
Consumer budgets faced significant pressure due to a 2.4% annual rise in grocery prices in September. However, the grocery industry displays resilience due to the inelastic demand for its products. The undeterred demand allows retailers to transfer the inflationary impact to the consumers without heavily affecting sales volumes. Even heightened prices do not typically dissuade people from purchasing essential goods, guaranteeing consistent demand within this industry.
Throughout September, the grocery sector witnessed a remarkable 7% surge in expenditure, surpassing the year-on-year revenue growth reported in July (5.3%) and August (4.5%) 2023.
Consumer demand aside, the persistent focus on innovation and value creation drives growth, broadens revenue streams, and enhances operational efficiency. An overwhelming 85% of retailers are reported to have explored cutting-edge technologies to enrich customer experiences, and an estimated 35% of suppliers leverage AI technology to harness consumer data. These collaborations lift the grocery industry and notably improve e-commerce and in-store experiences.
The global food and grocery retail market is forecasted to reach $14.78 trillion by 2030, expanding at a 3% CAGR, propelled by increasing disposable incomes and evolving consumer preferences.
Given the industry tailwinds, it's time to examine the fundamentals of the three stocks to buy in the A-rated Grocery/Big Box Retailers industry, starting with the third in line.
Stock #3: DFI Retail Group Holdings Limited (DFIHY)
Based in Quarry Bay, Hong Kong, DFIHY operates as a retailer in Asia. The company operates through five segments: Food; Health and Beauty; Home Furnishings; Restaurants; and Other Retailing.
Its annualized dividend rate of $0.30 per share translates to a dividend yield of 2.31% on the current share price. Its four-year average yield is 3.76%. The company has paid dividends for 15 consecutive years, indicating DFIHY’s investor payback abilities.
In terms of forward EV/Sales, DFIHY is trading at 0.54x, 67.3% lower than the industry average of 1.66x. The stock’s forward Price/Sales multiple of 0.35 is 67.3% lower than the industry average of 1.08.
DFIHY’s trailing-12-month cash from operations of $999.10 million is 97.8% higher than the industry average of $505 million. Its trailing-12-month gross profit and levered FCF margins of 34.11% and 7.18% are 2% and 109% higher than the industry averages of 33.46% and 3.43%, respectively.
For the six months that ended June 30, 2023, DFIHY’s revenue stood at $4.57 billion, up marginally year-over-year, while its operating profit increased 22.8% year-over-year to $92.80 billion.
For the same period, its profit after tax and earnings per share stood at $5.30 million and $0.61 compared to a loss after tax and loss per share of $64.50 million and $4.25 in the year-ago period.
Street expects DFIHY’s revenue in the fiscal year ending December 2023 to increase marginally year-over-year to $9.19 billion.
The stock has gained 11.6% over the past year to close the last trading session at $13. Over the past month, it gained 4%.
DFIHY’s POWR Ratings reflect its robust outlook. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Growth and Stability. Within the A-rated Grocery/Big Box Retailers industry, it is ranked #9 out of 37 stocks.
Beyond what we have highlighted above, one can see DFIHY’s additional ratings (Value, Momentum, and Sentiment) here.
Stock #2: Tesco PLC (TSCDY)
Headquartered in Welwyn Garden City, the United Kingdom, TSCDY is a grocery retailer in the U.K., the Republic of Ireland, the Czech Republic, Slovakia, and Hungary. It offers grocery products through its stores and online. The company is also involved in wholesaling food and drink and provides banking, insurance, and mobile operating services.
On August 11, 2023, TSCDY announced a significant change to its product range in its Express stores. The overhaul will see 50 crucial everyday products replaced with items from its own-brand range, which cost less than a third of the products they replace. The company will generate higher revenues by replacing expensive products with value products.
Its annualized dividend rate of $0.41 per share translates to a dividend yield of 3.96% on the current share price. Its four-year average yield is 9.49%. TSCDY’s dividend payments have grown at a CAGR of 17.5% over the past five years.
In terms of forward EV/Sales, TSCDY is trading at 0.45x, 73% lower than the industry average of 1.66x. The stock’s forward Price/Sales multiple of 0.29 is 73.4% lower than the industry average of 1.08.
TSCDY’s trailing-12-month cash from operations of $5.30 billion is 949.2% higher than the industry average of $505 million. Its trailing-12-month asset turnover ratio of 1.42x is 65.3% higher than the industry average of 0.86x.
For the six months that ended August 26, 2023, TSCDY’s revenue and operating profit stood at £34.15 billion ($41.86 billion) and £1.48 billion ($1.82 billion), up 5.1% and 105.5% year-over-year, respectively.
For the same period, its adjusted profit after tax attributable to the owners of the parent and adjusted earnings per share stood at £886 million ($1.09 billion) and £12.26, up 11.6% and 16.8% year-over-year, respectively.
Street expects TSCDY’s revenue and EPS in the fiscal year ending February 2024 to increase 1.7% and 8.7% year-over-year to $83.79 billion and $0.89, respectively.
The stock has gained 27.2% year-to-date to close the last trading session at $10.29. Over the past year, it gained 56.4%.
TSCDY’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
TSCDY has an A grade for Stability and a B for Growth and Value. Within the same industry, it is ranked #8.
To see the other ratings of TSCDY for Momentum, Sentiment, and Quality, click here.
Stock #1: Village Super Market, Inc. (VLGEA)
VLGEA is a supermarket chain in the United States. It offers grocery, meat, produce, dairy, deli, seafood, prepared foods, bakery and frozen foods, health and beauty care, general merchandise, liquor, and pharmacy products through retail and online stores.
Its annualized dividend rate of $1 per share translates to a dividend yield of 4.17% on the current share price. Its four-year average yield is 4.34%. The company has paid dividends for 12 consecutive years.
In terms of trailing-12-month EV/Sales, VLGEA is trading at 0.28x, 83.1% lower than the industry average of 1.66x. The stock’s trailing-12-month Price/Sales multiple of 0.16 is 84.9% lower than the industry average of 1.04.
VLGEA’s trailing-12-month asset turnover ratio of 2.29x is 167.2% higher than the industry average of 0.86x. Its trailing-12-month ROCE and ROTA of 12.30% and 5.14% are 5.3% and 7.3% higher than the industry averages of 11.68% and 4.79%, respectively.
For the fiscal fourth quarter that ended July 29, 2023, VLGEA’s sales and gross profit stood at $553.81 million and $161.06 million, up 5% and 8.6% year-over-year, respectively.
For the same quarter, its operating income and adjusted net income stood at $20.21 million and $15.57 million, up 12.2% and 26.7% from the year-ago quarter, respectively. Its net income per share as per class A common stock and class B common stock increased 18.4% and 17.5% year-over-year to $1.03 and $0.74, respectively.
The stock has gained 21.5% over the past year to close the last trading session at $23.99. Over the six months, it gained 10.6%.
VLGEA’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and Stability and a B for Growth and Quality. It is ranked #2 within the Grocery/Big Box Retailers industry.
Click here to see the other POWR Ratings of VLGEA for Momentum and Sentiment.
What To Do Next?
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TSCDY shares were trading at $10.00 per share on Friday afternoon, down $0.30 (-2.87%). Year-to-date, TSCDY has gained 26.93%, versus a 14.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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