Over the past six months, Albertsons’s stock price fell to $14.12. Shareholders have lost 18.9% of their capital, which is disappointing considering the S&P 500 has climbed by 6.3%. This might have investors contemplating their next move.
Is now the time to buy Albertsons, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Albertsons Will Underperform?
Despite the more favorable entry price, we’re cautious about Albertsons. Here are three reasons you should be careful with ACI, plus one stock we’d rather own.
1. Lack of New Stores, a Headwind for Revenue
The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.
Albertsons operated 2,243 locations in the latest quarter, and over the last two years, has kept its store count flat while other consumer retail businesses have opted for growth.
When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.
2. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.
Albertsons has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 27.5% gross margin over the last two years. That means Albertsons paid its suppliers a lot of money ($72.53 for every $100 in revenue) to run its business.
3. Weak Operating Margin Could Cause Trouble
Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.
Albertsons’s operating margin has generally stayed the same over the last 12 months, averaging 2% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structureand low gross margin.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Albertsons, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 6.2× forward P/E (or $14.12 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward one of our top software and edge computing picks.
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