Over the last six months, Albertsons’s shares have sunk to $14.93, producing a disappointing 14.5% loss - a stark contrast to the S&P 500’s 9.3% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Albertsons, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Albertsons Will Underperform?
Even with the cheaper entry price, we’re cautious about Albertsons. Here are three reasons why ACI doesn’t excite us, plus one stock we’d rather own.
1. Lack of New Stores, a Headwind for Revenue
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
Albertsons operated 2,243 locations in the latest quarter, and over the last two years, has kept its store count flat while other consumer retail businesses have opted for growth.
When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.
2. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.
Albertsons has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 27.5% gross margin over the last two years. Said differently, Albertsons had to pay a chunky $72.53 to its suppliers for every $100 in revenue.
3. Weak Operating Margin Could Cause Trouble
Operating margin is an important measure of profitability for retailers as it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.
Albertsons’s operating margin has generally stayed the same over the last 12 months, averaging 2% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structureand low gross margin.
Final Judgment
Albertsons doesn’t pass our quality test. Following the recent decline, the stock trades at 6.9× forward P/E (or $14.93 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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