Shares of Albertsons (ACI) dropped in morning trading after the stock was downgraded at BMO Capital to the firm's Sell-equivalent rating, citing risk to the company's margins. The firm also lowered grocery peer Sprouts Farmers Market (SFM) to a Sell-equivalent rating.
SELL ALBERTSONS: BMO Capital analyst Kelly Bania downgraded Albertsons to Underperform from Market Perform. The analyst sees risk to the company's margin outlook given its "significantly greater" margin expansion relative to key grocery peers. Albertsons's margins are at risk in a more price-sensitive consumer environment and on the wage front as unionized grocers have been shielded from broader industry wage rate increases given contract negotiation cycles, Bania told investors in a research note. This could suggest a "wave of wage investments" in 2022 and 2023, contends the analyst.
Bania thinks Albertsons may be "over-earning" and says signs that peers are making price investments and also having difficulty passing on inflation are "concerning" against the backdrop of meaningful margin expansion and gains for Albertsons's stock in recent months.
Bania raised the firm's price target to $26 from $22, citing ongoing Covid-related tailwinds for traditional supermarkets, but sees downside in the stock from current levels. However, she continues to be positive on Albertsons's digital strategy and strong management team and expects Albertsons to raise guidance in October in conjunction with its earnings report due to continued strength in eating-at-home trends.
ALSO SELL SPROUTS: BMO's Bania also downgraded Sprouts Farmers Market to Underperform from Market Perform, citing similar themes as the Albertsons downgrade. The analyst warns that the shift to less price sensitive customers may prove to be much more challenging for the company than expected, and isn't sure the minor changes the management is making to marketing will "be enough," potentially driving Sprouts to once again become more promotional. Bania adds that these factors imply risks to the company's gross margins and earnings, particularly considering the risks around the more price-sensitive consumer going forward.
Bania lowered the firm's price target to $19, down from $21, citing her concerns. She also lowered her 2022 EPS estimate to $1.81 and thinks valuation could remain muted if the company's turnaround remains challenged.
PRICE ACTION: Shares of Albertsons fell 2.5% on Tuesday morning to $29.36, while Sprouts Farmers Markets fell 2.6% to $22.04
Albertsons
-0.655 (-2.18%)
Sprouts Farmers Market
-0.53 (-2.34%)