Over the past six months, Albertsons’s shares (currently trading at $15.73) have posted a disappointing 7.8% loss, well below the S&P 500’s 7.5% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Albertsons, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Albertsons Will Underperform?
Even with the cheaper entry price, we’re swiping left on Albertsons for now. 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
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
Albertsons listed 2,243 locations in the latest quarter and has kept its store count flat over the last two years 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
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
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 an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Albertsons’s operating margin has more or less 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 7.2× forward P/E (or $15.73 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.
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