Grocery store stocks are not immune to recessions but they have proved fairly resilient, as consumers have to visit grocery stores even under the most adverse economic conditions. In this article, we will discuss the prospects of three grocery stocks, namely Kroger (KR), CostCo ) and SpartanNash (SPTN). These companies have proved fairly resilient to recessions and offer reliable dividends.

Kroger Co. (KR)

Founded in 1883, Kroger is one of the largest retailers in the U.S. The company has nearly 2,800 retail stores under two dozen banners, along with fuel centers, pharmacies and jewelry stores in 35 states.

Thanks to its immense network of stores, Kroger enjoys significant economies of scale. On October 14th, 2022, Kroger announced that it had entered into a definitive merger agreement with Albertsons Companies. Kroger will purchase all of Albertsons’ outstanding shares at $34.10 per share, for a total value of roughly $24.6 billion.

On September 12th, 2024, Kroger reported second quarter 2024 results for the period ending August 17th, 2024. For the quarter, Kroger reported $33.9 billion in sales, flat compared to Q2 2023. Excluding fuel, sales increased 1.3% compared to the year ago period. Adjusted earnings-per-share equaled $0.93 compared to $0.96 in 2Q23.

Kroger updated its fiscal 2024 guidance. The company now expects identical sales growth without fuel to be in the range of 0.75% to 1.75%.

On October 14th, 2022, Kroger announced that it had entered into a definitive merger agreement with Albertsons Companies, Inc. (NYSE: ACI). Kroger will purchase all of Albertsons’ outstanding shares at $34.10 per share, for a total value of roughly $24.6 billion. In an effort to garner the necessary approvals and ease regulators, Kroger and Albertsons announced a divestiture plan in which it will sell 579 stores to C&S Wholesale Grocers, LLC for roughly $2.9 billion. 

This transaction includes the sale of QFC, Mariano’s, Carrs, and Haggen banners to C&S, as well as the private label brands Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals, and Waterfront Bistro. In February 2024, the FTC sued to block the proposed merger. The FTC’s preliminary injunction hearing began in late August and ended on September 17th. In-house hearings will start on October 1st if the injunction is issued.

Kroger has raised its dividend for 17 consecutive years. 

Costco Wholesale (COST)

Costco’s humble beginning in a converted airplane hangar has given way to a powerhouse in an industry it helped create. Today, Costco is a diversified warehouse retailer that operates more than 890 warehouses that collectively generate about $270+ billion in annual sales. 

Costco posted fourth quarter and full-year earnings on September 26th, 2024, and results were somewhat mixed, marking a departure from prior reports that were easy beats. Earnings-per-share for the quarter came to $5.29, which was 23 cents better than expected. Revenue was $79.7 billion, up 1% year-over-year, but missing estimates by $340 million. Comparable sales rose 5.4% during the quarter, with the US posting 5.3% growth, 5.5% in Canada, and International markets up 5.7%. 

E-commerce sales were up 18.9% on a comparable basis. After backing out gasoline and forex translation, comparable sales rose 6.3%, beating consensus by 30 basis points. The company noted it continues to gain share from Target and Walmart in e-commerce sales. Membership fee income was $1.51 billion, flat to a year ago and missing estimates by $30 million. The membership increase the company put in did not start until September 1st, so future quarters will have that tailwind. 

The vast majority of Costco’s operating margin dollars come from its membership fees, which continue to grow at strong rates, but are a very small fraction of total revenue. This is 100% margin revenue and fuels higher comparable sales, as well as more members and more people in the stores buying. The company does not buy back stock in any sort of meaningful quantity, so that is not a source of earnings growth.

Costco’s payout ratio is quite low at 26% for this year, and we believe it will remain near or under 30% going forward. The company has the ability to boost the dividend at a much higher rate but has thus far chosen not to. Regardless, Costco’s dividend is ultra-safe.

SpartanNash (SPTN)

SpartanNash is a value-added wholesale grocery distributor and retailer. It supplies 2,100 independent grocery retail locations in the U.S. and also owns itself 147 supermarkets in nine states. SpartanNash operates under retail banners such as Dan’s Supermarket, D&W Fresh Market, Econofoods, Family Fare, Forest Hill Foods and No Frills. The company is also a distributor of grocery products to U.S. military commissaries.

SpartanNash reported second quarter 2024 results on August 15th, 2024. Net sales of $2.23 billion was a 3.5% decrease from $2.31 billion in the same prior year period. Adjusted earnings from continuing operations decreased by 9% year-over-year to $0.59 per share and Adjusted EBITDA declined by 2.4% to $64.5 million.

The company’s net long-term debt to adjusted EBITDA ratio declined sequentially from 2.4X to 2.2X during the quarter. Leadership maintained its guidance for fiscal 2024, expecting total net sales of approximately $9.60 billion, from $9.73 billion in 2023.

SpartanNash's adjusted earnings per share have demonstrated a fairly consistent track record of long-term growth. Over the last nine and five years, SPTN has increased adjusted earnings-per-share by 2.2% and 3.1% on average. Going forward, we believe the company can expect adjusted EPS to grow by 4.0% per year. 

This increase in earnings will support 4.0% annual growth in the dividend over the next five years as well, which is consistent with the company’s nine and five-year average annual dividend growth rates of 6.7% and 2.5%, respectively. 

SPTN has increased its dividend for 14 consecutive years.

Disclosure: No positions in any stocks mentioned