Grocery Outlet vs. Albertsons: Which Stock is a Better Buy?

Albertsons Companies (ACI) in Boise, Idaho, operates food and drug stores in the United States. The company's food and drug retail stores offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel, and other items and services. In comparison, Emeryville, Calif.-based Grocery Outlet Holding Corp. (GO) owns and operates a network of independently operated stores. The company's stores offer products in categories that include dairy and deli, produce, floral, and fresh meat and seafood.

Investors’ concerns over the pace of economic recovery due to the resurgence of COVID-19 cases, high inflation, and a supply chain crisis have kept the market volatile. However, several retail companies have strengthened their online presence. Also, most retailers are dealing with inflation and product shortages by passing on higher costs to their customers through price hikes. Furthermore, the gradual revival of foot traffic in retail stores with the reopening economy should support retailers' growth. Indeed, according to a Research and Markets report, the global retail market is expected to grow at a 7.7% CAGR through 2025. Therefore, both ACI and GO should benefit.

GO has gained 20.8% in price over the past three months, while ACI has returned 2.5%. However, ACI’s 60% gains over the past six months compare with GO’s negative returns. Moreover, ACI is the clear winner with 98.5% gains versus GO’s negative returns in terms of the past year’s performance.

Click here to checkout our Retail Industry Report 

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On November 11, 2021, ACI announced the launch of Albertsons Media Collective, a retail media network that is designed to deliver digitally native, shopper-centric, and engaging branded content to the company’s ever-growing network of shoppers. Argyilan, SVP Retail Media at ACI, said, "Albertsons Media Collective will further our goal of bringing brands and our customers together by delivering an unrivaled vendor and customer experience and truly reimagining marketing for what’s next."

On October 21, 2021, GO announced a partnership with Instacart, the leading online grocery platform in North America, on a pilot program to make its iconic bargain shopping experience available online for the first time ever. GO’s CEO Eric Lindberg said, “We’re using this program with Instacart to continue expanding the strong foundation of touching lives for the better that Grocery Outlet was built upon 75 years ago."

Recent Financial Results

ACI’s sales and other revenue increased 4.4% year-over-year to $16.50 billion for the fiscal second quarter, ended September 11, 2021. The company’s adjusted EBITDA grew 1.8% year-over-year to $965.40 million, while its adjusted net income came in at $369.50 million, representing a 3.7% year-over-year increase. Also, its adjusted EPS was  $0.12, up 6.7% year-over-year.

GO’s net sales increased 0.6% year-over-year to $768.90 million for its  fiscal third quarter, ended October 2, 2021. The company’s adjusted EBITDA declined 6.2% year-over-year to $51.39 million, while its adjusted net income came in at $23.44 million representing a 15.3% year-over-year increase. Also, its adjusted EPS was  $0.24, up 14.3% year-over-year.

Expected Financial Performance

Analysts expect ACI’s revenue to increase 2.8% in the next quarter and 10.9% next year. However, its EPS is expected to grow 13.3% in the next quarter and 3.1% next year. Also, ACI’s EPS is expected to decline at a rate of 8.7% per annum over the next five years.

In comparison, GO’s revenue is expected to increase 9.4% in the next quarter and 10.4% in the next year. The company’s EPS is expected to grow 8.7% in the next quarter and 13.3% next year. Furthermore,  its EPS is expected to grow at 1.4% per annum over the next five years.

Profitability

ACI’s $68.96 billion trailing-12-month revenue is significantly higher than GO’s $3.10 billion. However, GO is more profitable, with gross profit  and net income margins of 30.65% and 2.58%, respectively, compared to ACI’s 29.71% and 1.04%.

In comparison , ACI’s ROE, ROA, and ROTC of 21.61%, 4.56%, and 6.83%, respectively,  are higher than GO’s 8.49%, 2.53%, and 2.71%.

Valuation

In terms of forward non-GAAP P/E, GO is currently trading at 32.01x, which is 141% higher than ACI’s 13.28x. Furthermore, GO’s 20.43x forward EV/EBITDA ratio is 195.7% higher than ACI’s 6.91x.

So, ACI is relatively affordable here.

POWR Ratings

ACI has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In contrast, GO has an overall D rating, which translates to Sell. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

ACI has a B grade for Value. This is justified given ACI’s 11.73x forward EV/EBIT, which is 29.5% lower than the 16.64x industry average. However, GO has a D grade for Value, which is in sync with its 37.58x forward EV/EBIT, which is 125.8% higher than the 16.64x industry average.

Also,  ACI has a B grade for Quality. This is justified given ACI's 30.36% trailing-12-month ROCE, which is 173.4% higher than the 11.10% industry average. However, GO has a C Quality grade, which is  in sync with its 8.49% trailing-12-month ROCE, which is 23.5% lower than the 11.10% industry average.

ACI is ranked second among  39 stocks in the A-rated Grocery/Big Box Retailers industry. In comparison, GO is ranked last.

Beyond what I have stated above, we have also rated the stocks for Growth, Sentiment, Stability, and Momentum. Click here to view all the ACI ratings. Also, get all the GO ratings here.

The Winner

The retail industry is expected to grow significantly amid the holiday season, with strong demand for goods. While both ACI and GO are expected to gain, we think it is better to bet on ACI now because of its lower valuation and better financials.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Grocery/Big Box Retailers industry here.

Click here to checkout our Retail Industry Report

ACI shares were unchanged in premarket trading Monday. Year-to-date, ACI has gained 78.95%, versus a 22.78% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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