Can Grocers Serve Up Profits – US-FOREX.US
Commodity costs are much cheaper than a year ago, so you’d think the food sector would have an easier time pleasing the Street with higher profits. But it’s not that simple: Consumers remain a challenge as companies vie for a bigger portion of their limited spending.
Whole Foods Market
has seen its number of shoppers dwindle amid the global economic slowdown. Although the company increased its store-label offerings and emphasized its price comparability to regular grocery stores, not as many consumers are currently able to pay extra for naturally-grown produce and minimally-processed food.Analysts are optimistic, however, about the Austin, Texas-based supermarket’s third-quarter earnings report, due out Tuesday. “The company is doing a good job of reducing expenses and bringing them more in line with current sales trends. It has also become more disciplined about the cost of building new stores and their size/location to ensure that returns are adequate,” said Barclays Capital analyst Meredith Adler. Whole Foods’ shares have more than doubled since January, but Adler remains cautious on the stock, as market expectations are high. Adler also said store expansion would have to be extremely limited to uphold the company’s aim to fund capital expenditures with internally generated cash and to generate free cash flow this year and beyond. Analysts polled by Thomson Reuters are expecting the company to report third-quarter earnings of 19 cents a share and sales of 1.9 billion. Popular brand companies like Kraft Foods
, which also reports on Tuesday, face similar difficulties in the current environment since shoppers often seek out store labels when searching for bargains. In response, Kraft said it would use cost savings to strengthen its key brand products. The Northfield, Ill.-based company is behind major labels like Oreo, Ritz and Jell-O.
According to Barclays analyst Andrew Lazar, promotional spending appeared to have paid off with improved volume and market share compared with the previous two quarters. “We estimate that, if current heightened promotional levels persist, Kraft would only offset about half of the potential margin favorability it faces from lapping higher year-over-year costs,” Lazer said. Companies with a strong presence in the dairy case-like Kraft and Dean Foods
-are expected to have an especially robust second quarter, according to UBS analyst David Palmer, who said dairy prices have been near historic levels. He warned that margin gains will likely peak in the second quarter and could substantially increase in the early part of next year. Palmer raised second-quarter estimates for both companies on Monday in anticipation of “significant gross margin gains.”Kraft is reporting second-quarter earnings on Tuesday, and analysts polled by Thomson Reuters are expecting profit of 54 cents on sales of 10.4 billion. Investors will be looking to see whether the company upholds year-end earnings guidance for 1.88 a share.Dean Foods, which reports second-quarter earnings on Wednesday, is anticipated to post a profit of 42 cents a share on sales of 2.8 billion. Lower diesel prices are expected to be another boon for the company, which uses the fuel for its refrigerated distribution system, Palmer said.Oilseed and grain processor Archer Daniels Midland
also reports fourth-quarter results on Tuesday. The company has suffered weak demand for its products in its previous quarter and although other oilseed processing and agribusiness companies like Bunge
and Corn Products International
recently reported estimate-beating profits, oilseed product volumes remain low. Analysts anticipate fourth-quarter earnings of 45 cents a share and sales of 15.2 billion.