Amid macroeconomic uncertainties, the grocery industry thrives thanks to its stability, driven by strong demand for essential food items, making it resilient to inflation and instability.
Considering these factors, it could be wise to buy fundamentally strong grocery stock Casey’s General Stores, Inc. (CASY). On the other hand, it could be wise to hold Target Corporation (TGT), given its uncertain outlook.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the grocery industry is well-positioned for growth.
In September, retail spending increased significantly by 3.4%, outperforming the 2.5% growth in August, driven by robust consumer spending, supported by lower inflation and a strong job market.
A Coresight Research report predicts that in 2023, the U.S. grocery sector will expand by 5.6%, reaching $1.50 trillion. This growth is driven by factors such as lower inflation rates and the increasing significance of non-traditional grocery retailers.
Big-box grocery retailers are thriving during economic uncertainty, mainly because they provide essential items. This achievement fits into a bigger pattern where the retail industry is still doing well because of the pandemic-accelerated growth of e-commerce and technology improvements.
Moreover, the grocery industry is transforming, with increased spending, rising online sales, shifting preferences, and pandemic-driven changes like at-home cooking and innovative delivery methods.
The global food and grocery retail market, valued at $11.32 trillion in 2021, is projected to grow at a 3% CAGR from 2022 to 2030.
Considering these conducive trends, let’s take a look at the fundamentals of the two above-mentioned Grocery/Big Box Retailers stocks.
Stock to Hold:
Stock #2: Target Corporation (TGT)
TGT operates as a general merchandise retailer in the United States. It offers apparel for women, men, boys, girls, toddlers, and infants and newborns, as well as jewelry, accessories, and shoes; and beauty and personal care, baby gear, cleaning, paper products, and pet supplies.
On October 3, 2023, TGT announced its holiday toy shopping season, featuring thousands of affordable toys and games under $25, along with an exclusive Disney100 Retro Reimagined collection. Additionally, TGT partnered with FAO Schwarz for new toys and created a 360° shoppable experience on Target.com for delightful toy shopping.
On August 10, 2023, TGT announced its fall designer collection in collaboration with Rowing Blazers. The collection offers over 100 colorful pieces spanning various categories, with most items priced under $30. The collection reimagines classic styles, offering versatile options for all seasons.
In terms of the trailing-12-month Capex/Sales, TGT’s 5.40% is 71% higher than the 3.16% industry average. Its 29.87% trailing-12-month Return on Common Equity is 155.8% higher than the 11.68% industry average. However, its 4.46% trailing-12-month EBIT margin is 44.2% lower than the industry average of 8%.
TGT’s total revenue for the fiscal second quarter ended July 31, 2023, declined 4.9% year-over-year to $24.77 billion. However, its operating income rose 272.9% year-over-year to $1.20 billion. Its net earnings rose 356.5% year-over-year to $835 million. In addition, its EPS increased 357.6% year-over-year to $1.80.
Street expects TGT’s EPS and revenue for the quarter ending October 31, 2023, to decrease 3.6% and 4.6% year-over-year to $1.48 and $25.29 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past month, the stock has declined 9.8% to close the last trading session at $108.36.
TGT’s POWR Ratings reflect an uncertain outlook. It has an overall C rating that translates to Neutral in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a C grade for Growth, Momentum, Stability, Sentiment, and Quality. It is ranked #27 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. To access TGT’s ratings for Value, click here.
Stock to Buy:
Stock #1: Casey’s General Stores, Inc. (CASY)
CASY operates convenience stores under the Casey’s and Casey’s General Store names. It offers a wide range of products, including food, beverages, tobacco, fuel, and more.
On August 15, 2023, CASY announced the acquisition of 63 convenience stores in Kentucky and Tennessee from EG America, LLC, with the deal set to close later this year, pending regulatory approvals. CASY plans to retain the store employees and ensure a smooth transition.
Darren Rebelez, President and CEO at CASY, predicted that this acquisition aligns with the company’s strategic plan to expand store growth in Kentucky and Tennessee, enhancing CASY’s presence in these areas.
In terms of the trailing-12-month Return on Common Equity, CASY’s 17.96% is 53.8% higher than the 11.68% industry average. Its 9.53% trailing-12-month Return on Total Capital is 44.3% higher than the 6.60% industry average. Likewise, its 2.47x trailing-12-month asset turnover ratio is 181.6% higher than the industry average of 0.88x.
CASY’s total revenue for the fiscal first quarter that ended July 31, 2023, came in at $3.87 billion. Its adjusted EBITDA increased 7.6% year-over-year to $315.45 million. The company’s net income rose 10.7% year-over-year to $169.24 million. Also, its EPS came in at $4.52, representing an increase of 10.5% from the prior year quarter.
Analysts expect CASY’s EPS for the quarter ending April 30, 2024, to increase 26.1% year-over-year to $1.88. Its revenue for the quarter ending October 31, 2023, to increase 1.9% year-over-year to $4.05 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 25.4% to close the last trading session at $264.06.
It’s no surprise that CASY has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system.
It has a B grade for Sentiment and Quality. Within the Grocery/Big Box Retailers industry, it is ranked #10 out of 38 stocks. To see CASY’s Growth, Value, Momentum, and Stability ratings, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
TGT shares were trading at $109.09 per share on Friday afternoon, up $0.73 (+0.67%). Year-to-date, TGT has declined -25.21%, versus a 11.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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