#The Ratings Game: ‘Better wine, better meat, more orchids’: Albertsons’ CEO says customers have traded up and they’re not going back down

Shoppers have continued to spend, in part, because of new-found kitchen skills that have developed during a year of restricted dining out.

See: Americans aren’t cutting back on spending — even with rising inflation

“People have learned to cook,” he said. “You always went out for seafood. Now people are eating more seafood than ever because people are cooking it at home.”

But it’s also due to the health of the consumer. Sankaran says Albertsons typically makes business plans with 1% or 2% inflation in mind. But in the current environment, customers can handle inflation at a bit higher rate.

“Typically where things have gone wrong is inflation in a recession,” he said. Even with the year-over-year declines, Sankaran called the quarter a strong one because the company lapped “blow out” numbers in 2020.

“One of the more lasting impacts of the pandemic will be people working from home a little more of the time,” he said. “If you work one day more from home, that’s still a substantial portion of your meals. We’re seeing that happen.”

Also: Consumers boost spending in June and spearhead U.S. economic recovery

On the earnings call, Sankaran also talked about the investments the company is making in things like store renovations, private-label brands and digital. Analysts say these investments will pay off.

“Our sense is that forecasts will continue to revise higher as Albertsons’ effective investment spending and strong in-store execution keeps boosting its market share,” wrote Credit Suisse analysts led by Robert Moskow.

The company has “inflation well under control,” Credit Suisse adds, maintaining its outperform stock rating with a $24 target price, up from $20.

“Inflation will increase later in the year as CPG [consumer packaged goods] vendors push through pricing, but it looks highly manageable at this point for Albertsons,” analysts said. “The company has $500 million in productivity savings and the promotional environment remains rational.”

CFRA maintained its buy stock rating and moved its price target to $25 from $22.

“Administering COVID-19 vaccines helped this quarter; however, other initiatives contributed to these stellar results, including digital investments (three micro-fulfilment centers now open – nine total by year end), private label, fresh products, and cost savings,” wrote CFRA analyst Arun Sundaram.

“We keep a buy, believe Albertsons is closing in on its largest competitor (Kroger) and that the company will benefit from this inflationary environment.”

JPMorgan analysts say that Albertsons’ stock is “particularly attractive” thanks to factors like stock valuation and the company’s balance sheet, which shows $2.2 billion in cash.

“In our view, grocers are likely to remain in a favorable environment for at least the next couple of quarters (if not longer),” analysts wrote.

“Food-at-home consumption shows little signs of slowing down; the re-acceleration of COVID-19 cases could prolong the situation into the fall. Price competition is essentially nonexistent, which should soon result in a relatively high flow through of input cost inflation to on-shelf pricing. And price elasticity is low, which could cause a larger-than-normal portion of retail price increases to flow through to identical sales.”

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JPMorgan rates Albertsons stock overweight with a $26 price target.

BMO Equity Research takes a more restrained view of the stock, with a market perform rating and $22 price target, up from $18.

“We remain positive on Albertsons’ Retro strategy and lower competitive crossover with price-aggressive peers, yet we remain cautious that current trends represent the norm and believe that inflation and mix trade-up are likely contributing factors to the strong trends on a two-year basis, which may continue into the second half at least,” analysts said.

Albertsons stock has gained 25.5% for the year to date while the S&P 500 index
SPX,
-0.18%
is up 16.8% for the period.