Fear of recession abounds. The economy shrank 1.6% annualized in the first quarter, and many economists expect a contraction in the second quarter as well.
So what stocks might be able to weather the carnage?
“We note that food retail stocks, including grocers, mass discounters, warehouse clubs, and dollar stores, have mostly outperformed the S&P 500 during prior recessions,” Bank of America analysts wrote in a commentary.
That includes the recessions of 1980, 1981-82, 1990-91, 2001 and 2007-09.
The analysts said, “we believe that this reflects that recessions tend to drive:
1. “Increased food-at-home spending.” The 2001 recession sparked “a pause in the decades-long shift toward food-away-from-home, while the global financial crisis resulted in food-at-home regaining share.
2. “Greater consumer price sensitivity that favors consumer trade-down into the discount/value retail channels. Walmart (WMT) has meaningfully and most consistently outperformed the S&P in each of the past five recessions. Costco (COST), Kroger (KR), Target (TGT), Dollar General (DG), and Dollar Tree (DLTR) have also outperformed.”
Inflation-Resistance Too
In addition to inflation fears, concern about inflation is permeating financial markets too, with consumer prices soaring 8.6% in the 12 months through May, a 40-year high.
“Food retail stocks also outperform during elevated inflation,” just like in recessions, the analysts said. “WMT, KR, COST, DG, and DLTR have typically outperformed the S&P 500 during periods of 3%-plus inflation.”
As for Kroger, it “significantly outperformed the S&P 500 during the 9% to 15% monthly annualized inflation during 1980-1982,” the analysts said.
To be sure, the grocery-store chain “then significantly underperformed in 1983-1984, as inflation normalized back to 3% to 4%.”
The pandemic has boosted food retailers. “Sales, margins, and earnings forecasts remain elevated versus 2019 levels for most of our food and discount retail coverage universe,” the analysts said.
They attribute that to “pandemic-driven consumption shifts, accelerating food inflation [that] supported sales, expense leverage and elevated gross margins, as supply-chain cost pressures passed through to consumers.”
Target is at Risk
The retailers that enjoyed “the most outsized sales and margin expansion gains since the onset of covid could face greater downside risk in a recession,” the analysts said. “We see the greatest potential sales and margin risks for Target in a recession.”
That’s because of its higher exposure to more discretionary categories, including home and apparel, and because Target's same-store sales were most negatively impacted during the global financial crisis, the analysts said.
As for the deep discounters, “we also see gross margin risks for DLTR and to a lesser extent DG from non-consumables sales weakness, as low-income consumer spending continues to fade,” the analysts said.
That “could … offset potential support from consumer trade-downs in a recession scenario,” they said.
“We view KR as best positioned for high inflation plus recession,” the analysts said. That’s because “KR's same-store sales were least impacted during the global financial crisis, and grocers should see less margin headwind from potential mix shifts toward grocery and away from higher-margin general merchandise sales.”
