Inflation is taking its toll on Albertsons (ACI 0.99%), despite the supermarket chain reporting fiscal 2021 third-quarter earnings with sales and profits that beat Wall Street estimates, while management raised full-year guidance.
Unfortunately, the root reasons it could post such strong numbers masked underlying woes it and other supermarkets face. Higher costs due to rising prices, supply chain challenges, and increased labor costs are conspiring to undermine its business, and grocery stores already operate on very thin margins.
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A weak link to growth
Albertsons said it generated $0.79 per share in adjusted earnings for the period ended Dec. 4. Revenue was up 8.6% year over year to $16.7 billion, thanks to comparable-store sales growth of 5.2%. Management raised its full-year guidance to at least $2.90 per share, well above the $2.50 base line it previously set and handily outstripping analysts' estimates of $2.64 per share.
Considering Wall Street expected Albertsons to report just $16.1 billion in sales with earnings of $0.59 per share, it's somewhat surprising the supermarket chain's stock plunged 10% following the earnings release. But comps growth was heavily reliant on price hikes to offset the impact of inflation, as well as the distribution COVID-19 vaccines, neither of which is a sustainable, long-term driver of growth.
There are diminishing returns associated with constantly raising prices, even in a period of runaway inflation, and the company will eventually run out of people to give the coronavirus jab. Pharmacy profit margins were higher in the quarter due to the vaccines, but that was all but wiped out by the decline in gross margin the company saw in its grocery business due to the inflationary environment.
Image source: Getty Images.
Raging inflation undermining the economy
Although supermarkets benefited at the expense of restaurants during pandemic lockdowns, inflation is now eating away at their business as the costs of beef, pork, poultry, eggs, sugar, and coffee soar.
Inflation is now at its highest level since 1982. While politicians have tried to assure consumers it is just temporary, even the Federal Reserve has warned this situation is not transitory, and that does not bode well for the economy, or for grocery stores like Albertsons.
Supermarkets operate on razor-thin margins. Albertsons' operating margin reached a high of 2.3% in 2021, but the chain's five-year average is actually just a minuscule 1.4%, meaning it doesn't have much room for higher costs. Net margins are even lower at an average of 0.4% over the last half decade.
A ripple effect across the economy
Worse for the supermarket, Albertsons doesn't see the situation improving any time soon, especially because of the rise of the Omicron variant of COVID. Despite Omicron being less virulent than other strains, it more easily infects people, including the vaccinated. The grocer is now anticipating its supply chain woes will last for longer than previously expected.
CEO Vivek Sankaran said, "There are more supply challenges, and we would expect more supply challenges over the next four to six weeks."
Wall Street agrees. Deutsche Bank analysts told investors after the earnings report, "For 2022, we expect supply pressures to likely linger for longer, perhaps until the second half of next year before gradually unwinding."
That's a long time to wait for a recovery, and it's a condition investors will undoubtedly hear repeated by other supermarket stocks and retailers.
