They’re on Different Aisles at Albertson’s Market

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Before We Start . . .

Jim: Seems only right, Mike, to first note that on the day we reviewed Hewlett-Packard last week, the company announced plans to split itself in two, with its computer/printer lines going one way and its venerable electronics test-equipment business the other.

Mike: Which sent HP’s stock sharply higher, at least briefly.

Jim: Right--which was good for you because you recommended the shares, and bad for me because I didn’t. But I’ll take solace from knowing that HP took that action to give the company and its sagging stock more focus--the exact thing I said they needed.

Mike: And I’ll stage a brief gloating session to note my confidence that the engineers at HP would figure out a way to fix what was going wrong. Only time will tell if this is the start of something new in Palo Alto, but it shows they’ve got their eye on the ball.

Albertson’s (ABS)

Mike: Now then, Albertson’s briefly had the distinction of being the nation’s largest supermarket chain last summer, right?

Jim: Correct. That’s when it announced plans to buy American Stores, which owns the Lucky grocery chain and the Sav-on drugstore chain, for $12 billion. But then Kroger spoiled the party by saying it would buy the company that owns Ralphs Grocery, among others, giving it a continued claim on the No. 1 spot.

Mike: I don’t know about you, Jim, but when I consider the supermarket industry these days, I get about as confused as when I’m walking down the grocery aisle trying to decide whether I should buy Raisin Bran, Corn Flakes or just go with Special K. And this wave of mega-mergers is a big part of the problem.

Jim: It is confusing, but we’ll cut through the clutter. As you know, the supermarket business is incredibly competitive, which is why grocery stores are notorious for having some of the thinnest profit margins in business. If, after taxes, a chain earns a penny or two per dollar of sales, it’s considered a market leader.

Mike: On the other hand, in good times and bad--people gotta eat.

Jim: Which is why supermarket chains are classic “defensive” stocks.

Mike: That’s right.

Jim: Even so, with all that competition, the chains are constantly under pressure to keep prices down. That makes it hard to grow sales and produces those skimpy profit margins. So the chains have decided that mergers help solve the problem.

Mike: Keep going.

Jim: Well, by gobbling up other chains, a supermarket company can spread its overhead costs across a much bigger base of stores. It also instantly gains market share. Albertson’s, for example, will jump from an also-ran in Southern California to a dominant player, because it will also have Lucky. That’s not all. By becoming so much bigger, Albertson’s and the other surviving chains believe they can wrestle better terms from the big food companies--cutting the grocery stores’ costs. And when you’re turning a 1% or 2% profit margin, that’s important.

Mike: Right, and to the extent the chains don’t pass those cost savings on to us, that’s increasing their margins.

Jim: True.

Mike: It also gives them room to offer an “everyday low prices” strategy, or a greater number of deals for their frequent-shopper cardholders. But the question before us, Jim, is whether all this maneuvering will get more people into Albertson’s stores and whether that will help its stock.

Jim: I’m not so sure it will. You know, I have a theory about grocery stores, at least in Southern California . . .

Mike: What, that they’re really open only 23 hours a day?

Jim: No, that most people simply shop at the store that’s closest to where they live, assuming it’s got decent prices and service. It’s the convenience factor.

Mike: Hmmm. But what about somebody like me, who has a Lucky and a Vons that are, within probably a half an inch, equidistant from my house?

Jim: Then it still boils down to whether you think you’re getting better prices and services in one or the other. But I don’t think most Southern Californians have your problem.

Mike: All I know is that I usually have my Vons card with me when I’m in Lucky, and my Lucky card with me when I’m in Vons, so I’m probably not the right one to ask anyway.

Jim: As for Albertson’s, it’s come a long way since it was started some 60 years ago as a single store in Boise, Idaho . . .

Mike: Where it’s still headquartered.

Jim: . . . And now it’s up to nearly 1,000 stores, not including the American Stores addition. Also, Albertson’s last week announced higher results for its fiscal year ended Jan. 31, which means it has now posted gains in sales and earnings for 29 straight years despite the inherently low profitability of the grocery business.

Mike: It’s considered an industry model of good execution.

Jim: Fair enough. And after Albertson’s announced the American Stores deal last August, Albertson’s stock rallied sharply for the rest of the year. But it’s been slumping so far this year, and now trades in the mid-50s, or about 21 times this year’s earnings per share. One reason: It posted disappointing sales in January.

Mike: Although Albertson’s sort of pleaded guilty with an explanation.

Jim: Which was?

Mike: That the Super Bowl, which normally falls into the January sales reporting period, this year fell into the February period. So this year’s January results looked weaker by comparison.

Jim: Normally I think retailers have a terrible habit of blaming the calendar or the weather for their lousy results. But Albertson’s has a point this time, because I made the mistake of wandering into a supermarket on Super Bowl Sunday and it was a madhouse.

Mike: Yeah, but wasn’t the Super Bowl played on the same date for Vons and Ralphs as it was for Albertson’s, or is Albertson’s in some sort of Einsteinian time warp?

Jim: Regardless, I’d pass on this stock--for a while at least. There’s no question that Albertson’s has a great track record, despite its recent slips. But I see this stock moving sideways for a few months while the company gets past its flattish sales performance of late, at the same time it’s trying to digest the huge American Stores empire. It also looks like the short-sellers are with me on this one, because Albertson’s short interest--that is, the amount of stock that’s been sold short and not yet repurchased, in the expectation that Albertson’s price will keep dropping--is very high.

Mike: Isn’t that usually a bullish indicator?

Jim: That’s what you keep saying, on the theory that eventually the shorts have to cover by purchasing back the stock, which could drive up the price. But who knows when they’ll cover? In the meantime, it’s a red flag indicating that a lot of investors see trouble ahead for this outfit.

Mike: Couldn’t disagree more. Albertson’s sales and earnings-per-share growth will keep accelerating smartly as this year goes on. When this becomes evident, everybody who contributed to the stock’s recent sell-off is going to pile right back in, driving the price even higher. Albertson’s also will exploit its great opportunity to extract economies of scale in the American Stores deal, which will boost its profit. Oh, and one other thing.

Jim: Yes?

Mike: People gotta eat.

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Write or e-mail with a stock you would like to see discussed in this column. Times Staff Writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times Staff Writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of a new book, “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Era.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.