Unbridled inflation has pushed up the prices of goods – from groceries to gas and other household items – taking a large chunk out of consumers’ monthly budgets. In the United States, annual consumer prices jumped 9.1% in June, the largest increase in more than four decades.
However, inflation is generally positive for retailers and consumer goods companies, as higher prices mean greater sales value. One way for investors to offset the corrosive effects of inflation on their portfolios is to add some of these companies to their investment portfolios.
The following chain stores are the best names in their category to consider. Consumers may cut spending, but they will still need the goods and services of these companies, making these stocks one of the best defensive choices to hold in various market conditions, including the bear market.
America’s leading general merchandise retailer, Target (TGT) offers a variety of products across multiple categories, including beauty and household essentials (26% of sales in 2021), food and beverages (19%), home furnishings and decoration (19%), basic products (18%) and clothing and accessories (17%).
The company also has a strong e-commerce business, which accounts for around 19% of sales.
Acting with agility in response to changing consumer behavior due to high inflation, Target announced a new suite of back-to-school benefits and promotions. The retailer increased the student discount to 20% while extending its teacher preparation event by nearly six weeks.
“Target has adapted to the digitalization of retail, but we believe it faces a highly competitive environment with negligible customer switching cost,” said a Morningstar equity report, noting that the retailer could be vulnerable to competitive onslaught.
That said, the company’s efforts (started in 2017) to renovate its stores to serve as omnichannel fulfillment centers are impressive. “It should remain better positioned than its smaller rivals, fueled in part by cost leverage and its own brands,” said Zain Akbari, equity analyst at Morningstar.
As Target sales have surged since the pandemic hit in early 2020, the more fragile inflationary environment could put pressure on revenue and earnings, says Akbari, who recently downgraded the stock’s fair value at US$166 vs. US$171.
This decision was prompted by “management’s plans to aggressively focus on optimizing inventory through markdowns, closures and other measures designed to address recent assortment imbalances caused by changes in consumer spending in light of runaway inflation,” he adds.
The leading American grocer, Kroger (KR) operates under several banners across the United States. About 83% of stores have pharmacies, while almost 60% also sell fuel. The company also operates approximately 120 fine jewelry stores.
As industry factors erode its competitive position, Kroger still enjoys long-lasting intangibles and cost advantages. “Among traditional grocers, Kroger is uniquely positioned to defend its returns against a competitive onslaught that is expected to intensify as Amazon, mass merchandisers and hard discounters aggressively price to drive volume,” a report said. on Morningstar shares.
Kroger’s local market scale allows it to derive cost leverage that fuels competitive pricing and the investments needed to build its presence in emerging channels. “Its progress should be accelerated by partnerships (Walgreens, Microsoft, etc.) that we don’t believe are available to smaller rivals because they can’t offer the same value to their counterparts,” Akbari argues.
Kroger’s vast library of consumer data is expected to play an important role in its digital transformation. “We expect data to play a key role in retailers’ efforts to drive traffic, efficiency and conversion, and we expect Kroger’s long and intimate relationship with its many customers (96% of sales are tied to a loyalty card) has created a monetizable network, an asset few can match,” says Akbari who recently increased the fair value of the stock to US$47.50 from US$43.
Additionally, he adds, Kroger’s ability to leverage distribution costs, investments in omnichannel offerings and supply chain capabilities should enable it to continue to outperform its pure-play rivals.
The American retail giant, Walmart (WMT) sells a variety of general merchandise and grocery items. The United States represents 82% of sales, while Mexico and Central America (6%) and Canada (4%) are its main external markets. The company derives approximately 56% of its sales from groceries, 32% from general merchandise and 11% from health and wellness items. He also operates several e-commerce properties outside of his namesake site, including Flipkart and shoes.com (he also has a roughly 10% stake in Chinese online retailer JD.com).
Walmart’s broad moat stems from intangibles and a sustainable cost advantage. “With unrivaled scale, prodigious supply strength, a strong brand and a growing e-commerce platform, Walmart is the only US retailer capable of comprehensively competing with Amazon’s retail offering. “, says a Morningstar report on stocks.
Although the retail environment is fiercely competitive, retailer scale provides cost leverage that can be used to keep prices low. “Walmart should be able to compete aggressively, especially for the roughly 50 million households [that] don’t subscribe to Amazon Prime, a proposition solidified by the introduction of the Walmart+ membership program,” says Akbari.
While its days of growing national store counts may be behind it, Walmart has redirected capital to build infrastructure that could help drive mid-double-digit e-commerce growth for years to come. “Traditional channel growth is expected to be difficult to achieve, but we believe Walmart’s strong grocery offering will drive traffic, fueling its ability to leverage costs and investments in automation and infrastructure,” says Akbari, which recently reduced the fair value of the stock to US$138. $152, reflecting greater than expected margin pressure amid rising inflation.