Although inflation has declined this year, grocery prices rose 0.3% sequentially in July and 3.6% year-over-year. While consumer spending rose to a six-month high in July, the growth is unlikely to be sustained with higher borrowing costs and the resumption of student debt repayments in October.

Despite an expected slowdown in consumer spending, the grocery industry is unlikely to be affected due to the non-discretionary nature of groceries. Consumers will likely reduce their discretionary expenditure and focus on the essentials. Therefore, it could be wise to add fundamentally strong grocery stocks Tesco PLC (TSCDY), Target Corporation (TGT), and Costco Wholesale Corporation (COST) to one’s watchlist.

Before diving deeper into the fundamentals of these stocks, let’s discuss why the grocery industry is expected to perform steadily amid the uncertain macroeconomic conditions.

The signs of inflation easing from last year’s peak showed results, as U.S. consumer spending rose 0.8% in July, the most in six months. Moreover, retail sales were better than expectations, rising 0.7% sequentially in July and 3.2% year-over-year.

However, the burden of higher interest rates, increased unemployment, the resumption of student loan repayments, and declining savings will likely impact consumer spending in the near-to-mid term. Morgan Stanley economists expect a slowdown in consumer spending in the coming quarters. In an analyst note, it predicted a “hangover effect on consumption” in the fourth quarter.

These headwinds are expected to impact consumer spending going ahead. However, the grocery industry is unlikely to be impacted as they witness stable demand for the goods they sell, helping them maintain their profit margins. Consumers usually cut down on their discretionary spending during times of uncertainty but keep their non-discretionary spending intact.

In light of these factors, let’s look at the fundamentals of the three best Grocery/Big Box Retailers stocks, beginning with number 3.

Stock #3: Tesco PLC (TSCDY)

Headquartered in Welwyn Garden City, the United Kingdom, TSCDY operates as a grocery retailer in the United Kingdom, the Republic of Ireland, the Czech Republic, Slovakia, and Hungary. It offers grocery products through its stores as well as online. The company is also involved in the food and drink wholesaling activities. In addition, it 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 the expensive products with its value products.

TSCDY’s 6.43% trailing-12-month gross profit margin is 80.3% lower than the 32.61% industry average. Likewise, its 1.13% trailing-12-month net income margin is 72.7% lower than the 4.15% industry average. Furthermore, the stock’s 1.48% trailing-12-month Capex/Sales is 53.2% lower than the industry average of 3.16%.

On the other hand, in terms of the trailing-12-month asset turnover ratio, TSCDY’s 1.38x is 50.1% higher than the 0.92x industry average.

For the fiscal year ended February 25, 2023, TSCDY’s revenue (exc. VAT, inc. fuel) increased 7.2% year-over-year to £65.76 billion ($82.05 billion). Its adjusted operating profit declined 6.9% year-over-year to £2.63 billion ($3.28 billion).

The company’s adjusted profit after tax attributable to the owners of the parent declined 3.4% over the prior-year quarter to £1.64 billion ($2.05 billion). Also, its adjusted EPS came in at 21.85p, representing a marginal decline year-over-year.

Analysts expect TSCDY’s EPS for fiscal 2024 to decline 1.9% year-over-year to $0.81. Its revenue for the same year is expected to increase 4.7% year-over-year to $86.20 billion. The stock has gained 17.9% year-to-date to close the last trading session at $9.53.

TSCDY’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Within the Grocery/Big Box Retailers industry, it is ranked #29 out of 38 stocks. It has a C grade for Value, Sentiment, and Quality. Click here to see the other ratings of TSCDY for Growth, Momentum, and Stability.

Stock #2: Target Corporation (TGT)

TGT operates as a general merchandise retailer. The company offers apparel, jewelry, accessories, shoes, beauty and personal care, etc. It also provides dry grocery, dairy, bakery, meat, and other food service; electronics, toys, entertainment, sporting goods, and luggage; home décor, home improvement, among other products.

In terms of the trailing-12-month Return on Common Equity, TGT’s 29.87% is 156.6% higher than the 11.64% industry average. Likewise, its 2.04x trailing-12-month asset turnover ratio is 122.8% higher than the industry average of 0.92x. Furthermore, the stock’s 5.40% trailing-12-month Capex/Sales is 71% higher than the industry average of 3.16%.

On the other hand, TGT’s 26.11% trailing-12-month gross profit margin is 19.9% lower than the 32.61% industry average. Likewise, its 3.12% trailing-12-month net income margin is 24.8% lower than the 4.15% industry average. Furthermore, the stock’s 4.46% trailing-12-month EBIT margin is 43.4% lower than the industry average of 7.89%.

TGT’s total revenue for the second quarter ended July 29, 2023, declined 4.9% year-over-year to $24.377 billion. Its operating income rose 272.9% over the prior year quarter to $1.20 billion. The company’s net earnings increased 356.5% year-over-year to $835 million. Also, its adjusted EPS came in at $1.80, representing an increase of 361.5% year-over-year. In addition, its EBITDA rose 93.7% year-over-year to $1.90 billion.

Street expects TGT’s EPS for the quarter ending October 31, 2023, to decline 3.3% year-over-year to $1.49. Its revenue for the quarter ending January 31, 2024, is expected to increase 1.4% year-over-year to $31.83 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 27.1% to close the last trading session at $124.46.

TGT’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.

It is ranked #28 in the same industry. It has a C grade for Growth, Momentum, Stability, and Quality. To see the other ratings of TGT for Value and Sentiment, click here.

Stock #1: Costco Wholesale Corporation (COST)

COST engages in the operation of membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company offers sundries, dry groceries, candies, coolers, freezers, liquor, and tobacco and deli products; appliances, electronics, health and beauty aids, hardware, etc. It also operates pharmacies, opticals, food courts, and hearing-aid centers.

In terms of the trailing-12-month Return on Common Equity, COST’s 27.56% is 136.8% higher than the 11.64% industry average. Likewise, its 16.54% trailing-12-month Return on Total Capital is 155.3% higher than the industry average of 6.48%. Furthermore, the stock’s 3.61x trailing-12-month asset turnover ratio is 293% higher than the industry average of 0.92x.

On the other hand, COST’s 1.71% trailing-12-month Capex/Sales is 45.8% lower than the 3.16% industry average. Likewise, its 1.83% trailing-12-month levered FCF margin is 46.3% lower than the 3.41% industry average. Furthermore, the stock’s 4.34% trailing-12-month EBITDA margin is 62.2% lower than the industry average of 11.47%.

COST’s total revenue for the third quarter ended May 7, 2023, increased 2% year-over-year to $53.65 billion. Its net sales rose 1.9% over the prior-year quarter to $52.60 billion. The company’s net income attributable to COST declined 3.8% year-over-year to $1.30 billion. Its EPS came in at $2.93, representing a decline of 3.6% year-over-year.

For the quarter ended August 2023, COST’s EPS and revenue are expected to increase 14.6% and 8.2% year-over-year to $4.82 and $78.02 billion, respectively. The stock has gained 20.2% year-to-date to close the last trading session at $548.62.

COST’s uncertain outlook justifies its overall rating of C, which translates to Neutral in our proprietary rating system.

It is ranked #27 in the Grocery/Big Box Retailers industry. It has a C grade for Growth, Value, Momentum, Sentiment, and Quality. In addition to the POWR Rating grades I’ve just highlighted, you can see COST’s rating for Stability here.

43 Year Investment Pro Shares Top Picks

Steve Reitmeister is best known for his timely market outlooks & unique trading plans to stay on the right side of the market action. Click below to get his latest insights…

Steve Reitmeister’s Trading Plan & Top Picks >

COST shares were trading at $550.42 per share on Friday afternoon, up $1.80 (+0.33%). Year-to-date, COST has gained 21.26%, versus a 17.49% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

More...