Jefferies & Company Supermarket Outlook (WMT, KR, SWY)

In a research report released today by Jefferies & Co., the firm said that the economy appears to be at an inflection point, where "one road leads to the promised land for the supermarkets of more jobs, additional spending on food-at-home items and inflation. The other road is to the not-so-pleasant destination of stagnant/falling employment, trade down and deflation." Of these two scenarios, Jefferies analysts believe that the employment market will continue to strengthen, boosting supermarket profits. If this outlook is proven to be inaccurate, however, they said that they would favor Kroger KR and Safeway SWY as being relatively well-positioned. The company that would benefit the most from the negative scenario, however, is Wal-Mart WMT. The Jefferies analysts said that their latest survey in the Boston area revealed that WMT had opened a 27% gap with Shaw's, a 17% gap with Stop & Shop and a 15% gap with Hannaford. All of these price gaps were up over 200 bps from their most recent survey a few months ago. As long as the economy continues to rapidly get stronger, the analysts do not believe that WMT's price cuts will have a significant impact on competitors. "With payrolls now rising and multiple companies more upbeat about consumer spending, we continue to believe we are entering a part of the cycle that should benefit our supermarket names."