By Amy Tsao Like all large, traditional supermarket chains, Albertsons has been pulling out all the stops to compete more effectively with mighty Wal-Mart (WMT). Across the industry, it's a common theme -- a trend evidenced by the past winter's Southern California grocery workers' strike, which reflected the hard line on cutting labor costs.
Boise (Idaho)-based Albertsons (ABS) is the second-largest supermarket chain in the U.S., with 2,500 stores in 37 states under such well-known names as Acme, Super Saver, Jewel-Osco, and, of course, Albertsons. It has made changes to its information-technology system and is also trying to draw in more customers with new merchandise like toys and brewed coffee, courtesy of deals with Toys 'R' Us (TOY) and Starbucks (SBUX).
MOST PRESSURED. Despite these efforts, investors may see Albertsons' stock decline. On Aug. 31 it posted a 23% drop in second-quarter earnings per share to 34 cents amid highly aggressive pricing following the strike. That's still a penny higher than analysts' average expectation of 33 cents earnings per share. Total revenues, boosted by the acquisition of Shaw's supermarket chain in New England, increased by 13%, to $10.2 billion.
These days, Wall Street is focused on two measures of retail health: same-store sales and margins. Albertsons reported that profit margins eroded in the quarter by a percentage point to 28%. All supermarkets are competing on price to some degree, but of the three remaining national chains, Albertsons is under more pressure because it dominates fewer markets than competitors Kroger (KR) or Safeway (SWY), says Standard & Poor's analyst Joseph Agnese, who rates the stock sell. (Agnese doesn't own the stock, and S&P doesn't offer investment-banking services.)
GONE ELSEWHERE? One possible reason for the increased pressure on Albertsons' margins in the quarter: It likely used promotions to win back California customers in the months after the grocery workers' strike, analysts believe. "We want to see how much they promoted to try getting customers back," says Morningstar analyst Mitch Corwin, who notes that Safeway disappointed on its latest earnings report in large part because of heavy discounting and advertising.
As for same-store sales (for stores open more than one year), most analysts would have been pleased with a flat to slightly higher number, but Albertsons reported a decline of 1.5%. Supermarket sales are sensitive to economic trends and conditions, which have been unsettled over the summer and reflected a dip in consumer spending in June. Also, with prices for commodity items like milk and beef stubbornly high, Albertsons won't easily report same-store sales growth. Says Agnese: "We're not seeing any strong signs that the industry is getting any kind of boost from the economy."
More worrisome is the possibility that customers who stopped shopping at traditional supermarkets during the strike aren't coming back. "The fear is that consumers found Costco (COST) and Whole Foods (WFMI) and may be hooked," says Corwin. Consumers are also increasingly choosing superstores run by Wal-Mart and Target (TGT), as well as dollar stores on the very low end.
THE SPACE BETWEEN. Experts agree that differentiation is the key to winning market share. Albertsons is trying out new concepts like combination drugstore-supermarkets and bare-bones stores selling only "extreme value" items. For now, those approaches have yet to make a big impact. Supermarkets such as Kroger, Safeway, and Albertsons are "caught in the middle," between the low prices of super-stores and the premium offerings of grocers like Whole Foods, says Corwin.
Some optimistic voices are out there, however. RBC Dain Rauscher analyst Bob Toomey is hopeful that a near-term uptick in the broader economy and some help from Albertsons' internal cost-cutting efforts will be good news for the stock. If competition from Wal-Mart doesn't get much more intense, supermarkets could have a good year, Toomey says. He rates Albertsons outperform and sees its stock rising to $31 over the next 12 months. (Toomey doesn't own shares in Albertsons, and the firm has no banking business with Albertsons.)
Perhaps, but its longer-term health is still in question. "Consumers have lots of choices these days," says Corwin. That promises to makes things tough for Albertsons. Tsao is a reporter for BusinessWeek Online in New York