Sector Analysis: U.S. Grocers

Canadian grocers have been terrific investments over the years, with Loblaw (TSX:L), Metro (TSX:MRU), and Empire (TSX:EMP.A) handily outperforming the TSX Composite Index — and most other ones, too.

Our grocers have been a target for criticism over the last few years as stretched Canadian consumers blame them for OUT OF CONTROL grocery prices. Most of us just grumble to ourselves and move on, but a few malcontents aggressively complain on the internet and wish physical harm on Galen Weston and his uniquely punchable face.

My view has always been if y’all think a business is ripping you off legally, then it’s time to invert your thinking. Rather than complain about what a rip-off it is, then buy the stock. I’ve owned Metro for the better part of a decade now, but as long-term results have demonstrated, probably any of the big 3 would have delivered a better than acceptable outcome.

I wrote about Metro a couple of months ago if you’d like more on that one.

As much as I like Canadian grocery stocks, I’m not sure they’re buys today. Loblaw is trading for nearly 25x earnings. Metro and Empire are cheaper, but both aren’t very attractively valued versus their recent history. So I’m content to hold Metro and patiently wait for the other two to get to a no-brainer valuation. If they do, I’m in. And if they don’t, that’s fine. I’m okay with missing out.

Instead, I’ve pivoted my attention to U.S. grocers, which are much cheaper than those in Canada. I spent some time looking at the sector recently and found some things I like — as well as some negatives. But I think overall it’s an attractive sector for Canadian dividend investors, especially those who like buying when things are unloved. Like I so very much do.

Let’s dive in.

For those of you who don’t know, I’m a veteran of the grocery business. I spent much of my career there. So I’ll talk about the sector in general both as an investor and as an operator.

The first thing Canadians need to know about U.S. grocers is how fragmented the market is. There are dozens of regional operators in areas as small as a city or a portion of a state. There are big operators — Walmart, Costco, Kroger and Albertsons make up the top four — but combined they have about a 40% market share.

This McKinsey report is an excellent resource for those looking for more info on the U.S. grocery business.

Compare that to Canada, where five big players (Loblaw, Walmart, Sobeys/Safeway, Metro, and Costco) dominate the industry. They combine for a market share of close to 80% of all groceries bought in the country. Other companies are fighting for the scraps.

The fragmented market in the U.S. makes for some interesting dynamics. A chain will get acquired every few years or so, plus you have new folks getting into the game. Most are also privately held — often by families who have quietly built up the business over multiple decades — so there’s no way for you or I to invest in them. They just quietly do their thing away from the noise of Wall Street — which in my view is a much better choice.

The sheer variety makes it super interesting for those of us who follow the industry. Some small chain you’ve never heard of will carve themselves out a nice business in somewhere like Salt Lake City (Harmons) or St. Louis (Schnucks) or San Antonio (H-E-B). They all do things a little differently, and all manage to easily hold their own against the big guys.

This dynamic also makes the market appear to be more competitive than it really is. Look at the number of competitors! So many! But most cities have maybe a half dozen different chains — including Walmart and Costco. That’s not much different than Toronto or Montreal.

U.S. grocers are also facing another challenge — the rise of the hard discounters. After decades of success in Europe, German hard discounters Aldi and Lidl have expanded to the United States. Aldi has some 2,300 stores across 38 states and has become a major player, while Lidl is gaining share along the east coast of the United States. There are others too, including Save A Lot and dollar stores.

The closest thing Canada has to an Aldi or Lidl is No Frills, which has some Aldi/Lidl characteristics — like an emphasis on private label — but is also much more like a traditional store than a true hard discounter.

Aside: If you want to learn more about the hard discount business model (which is fascinating, IMO) check out this book. It’s not cheap, but worth it if you’re a grocery nerd like me.

Despite the fragmentation in the market, there really aren’t that many U.S. grocery stocks. There’s even fewer if we take out the three that are large grocers, but are really so much more than that. I’m talking Costco, Walmart, and Target here. So we’ll exclude them from this exercise and focus on a few of the others.

Rather than telling y’all about my podcast — Bob and I are still on our summer hiatus — instead I’ll tell you about another pod I did. This one is with Willows — of Drunk Dividends fame on Twitter — where we talked about Exchange Income Corporation (TSX:EIF). I also went on a few unhinged rants, because why not.

Check that bad boy out on Spotify or wherever else you might get your pods.

Kroger (NYSE:KR) is the largest pure-play grocer in the United States, and it might be the most interesting name on this list.

Headquartered in Cincinnati, Kroger has grown significantly from its mid-west roots. These days it has almost 2,700 stores spread across 35 states. It has traditionally acquired smaller grocers and then kept the local branding, which helps disguise its size a bit.

Kroger is currently in the process of buying Giant Eagle, a $1.65B deal consisting of $1.25B in cash and the assumption of $400M in liabilities. Giant Eagle has 197 supermarkets and 11 stand-alone pharmacies across Ohio, Pennsylvania, West Virginia, Maryland, and Indiana. Since it’s just acquiring another regional chain, this deal shouldn’t attract the attention of regulators, unlike the recent mega-deal between Kroger and Albertsons that fell apart under regulator scrutiny.

Kroger is quietly a good operator. It’s also doing things right on the financial side. It steadily has increased its earnings over time, further goosing earnings per share by steadily buying back its stock — including repurchasing nearly 9% of shares outstanding in fiscal 2025 alone. It has also raised the dividend consistently, including 20 consecutive years of hikes. The payout is currently $1.56 per share — a more than 11% increase versus last year — and the yield is 2.5%. That’s a nice combination. The payout ratio is approximately 30% of earnings, too.

The other thing attractive about Kroger is the valuation. The stock currently trades at about 11x earnings, which especially cheap once we factor in earnings growth. Kroger has increased its bottom line by approximately 150% over the last decade, or nearly 11% per year. Analysts continue to be bullish, too, with expectations of growth continuing.

We’ll note here that growth since 2023 looks somewhat anemic because Kroger, like most grocers, overearned during COVID. But the long-term story remains intact once we look beyond the noise.

Kroger also has a good balance sheet, high returns on equity/invested capital, and is trading at close to a 52-week low. That’s when I like to buy.

The bear case is as follows. The U.S. consumer is struggling, especially on the low end. The thought is these folks are increasingly going to Walmart or Costco, since they perceive them as better value. Kroger is also somewhat weak in online sales, which have returned to growth again after COVID pulled so much demand forward.

Albertsons (NYSE:ACI) is the second-largest pure grocer in the United States, with a market share of approximately 5%. It has some 2,200 stores across 35 different states. Like Kroger, Albertsons is a collection of local brands that were acquired and then never rebranded.

We’ll note that Safeway’s U.S. stores were acquired by Albertsons, while the Canadian stores were acquired by Empire. They are no longer affiliated.

Albertsons and Kroger announced the intention to merge back in 2022. It was not a popular deal with regulators — who feared consolidation in a politically charged industry — and the deal was abandoned officially in 2024. Albertsons then sued Kroger, claiming it didn’t do all it could to make sure the deal went through. Kroger counter-sued, and the lawsuits are working their way through the courts now.

My view is Albertsons needed that deal to go through a lot more than Kroger did. Albertsons emerged from the process in not the best shape. It has a stretched balance sheet, with a debt-to-EBITDA ratio of more than 3x. (Kroger, as well as the Canadian grocers, have debt-to-EBITDA ratios closer to 2x). It has also posted disappointing same-store sales results, including a 0.8% decline in its most recent quarter. Kroger’s same-store sales weren’t great either — they increased by just 1% — but that’s much better than Albertsons.

On the plus side, Albertsons is cheaper than Kroger on most measures. It trades for just over 6x forward earnings and 4x forward free cash flow. Even once we include the debt, Albertsons is cheaper than Kroger. The current earnings multiple is as cheap as the company has been since 2020 when it re-emerged on the public markets after previously being owned by private equity.

Albertsons is also attractive from one other perspective — the dividend yield. It offers a more than 6% dividend yield today, some 150% higher than Kroger. Even if earnings expectations continue to fall the payout is still sustainable; it currently sits at about 35% of expected fiscal 2027 earnings.

I wrote about Ingles (NASDAQ:IMKT.A) a couple of years ago, and shares have performed fairly well. The stock is up almost 50% even as revenue and earnings have struggled a bit.

Not much has changed since then. Ingles still owns much of its own real estate, which would be worth a bundle if the family would ever bother to spin it out. I used to wait patiently for companies to do no-brainer moves like that. Now I steer clear of these situations like a deadbeat dad avoids child support. I’m happy to let companies like Ingles do their thing without me.

Fun fact: Sprouts Farmer’s Market (NYSE:SFM) is the last stock I owned that didn’t pay a dividend. I bought in 2022 and sold in 2024, turning my $25.xx per share initial investment into something that was more than 4x higher in just over two years. It was an excellent return, and I kicked myself as my $105ish purchase price looked worse and worse. The stock eventually ran up to $170+ before falling to today’s level of just over $80.

Even after the big decline it’s still been a fantastic investment.

I liked Sprouts for a few reasons. I thought it had a nice niche in the better-for-you part of the market. It competed there against Whole Foods, but it did a nice job of holding its own. I also liked the emphasis on produce and the fresh parts of the store, while Whole Foods seemed to be more interested in centre store.

Sprouts was also able to expand while also retaining enough of its cash flow to repurchase large amounts of its shares. The company had a nice history of repurchasing shares before I bought, and it has continued doing so. I viewed that as a form of capital return, which is how I was able to justify purchasing it while the rest of my portfolio paid dividends.

A one-third reduction in the number of shares outstanding is excellent. Interestingly, it’s about the same as what Kroger has been able to accomplish — all while it also increased its dividend.

Finally, Sprouts was damned cheap from a price-to-earnings perspective. I paid just over 10x forward earnings, which I thought was a great price for a company that had a history of growing the bottom line by more than 10% per year.

Today Sprouts still has a lot of these things going for it. Sales grow by 7-10% per year, with the bottom line increasing by a little more than that. It continues to gobble up shares and not pay a dividend. The valuation isn’t quite as cheap as before — it trades for about 15x forward earnings — but it’s still quite reasonable considering the growth.

The bear case here is fairly simple too. If the U.S. consumer continues to struggle, then a fancier grocer like Sprouts will get hit harder than a Kroger or Albertsons. Everybody wants to feed their kids the good stuff, but that kind of commitment is a lot harder to pull off when you lose your job.

Ahold Delhaize (ENXTAM: AD) shares primarily trade in the Netherlands. That makes them pretty much inaccessible for a lot of you — although there is an OTC listing in the United States. I include it because it’s an interesting way to get exposure to both a U.S. and European grocer and a pretty reasonable price.

Ahold is the largest grocer in the Netherlands, Belgium, and Romania, and is the number two player in the Czech Republic and Greece. It also owns several chains in the eastern part of the United States, including Food Lion, Stop n’ Shop, and The Giant Company. About 60% of the company’s sales are in the United States, making it primarily a U.S. grocer. Finally, it has a partnership in Indonesia which has become the number one grocer there — although it’s overall market share is still low in a country dominated by corner stores and mom-and-pop grocers.

My view is these guys should explore a U.S. listing, but shares were listed in the U.S. and most investors didn’t care. Trading volume was a fraction of that in Amsterdam, so the company abandoned it and instead went with the OTC listing. I get the logic, even if I can’t buy it via Wealthsimple. The ticker symbol there is ADRNY if you’re interested.

Like Kroger and Albertsons, Ahold offers a nice combination of dividend yield (currently around 3.5%), and history of dividend growth. It has also been steadily repurchasing shares for years ever since the transformative transaction that combined Ahold and Delhaize. It hasn’t quite made the same amount of progress as Kroger or Sprouts, but it has reduced its share count by about 25% over the last decade. That’s not bad.

The balance sheet is also decent (the debt-to-EBITDA ratio is in the Kroger neighbourhood, not the Albertsons neighbourhood) and it trades for about 12x earnings. That’s a very reasonable level in my book. It has also more than doubled both earnings and dividends since the big 2017 transaction, which represents about 8% annual growth. These grocers have delivered decent growth despite being mature businesses, and nobody seems to notice or care.

I like the U.S. grocery sector today, and I’m considering buying one of the names discussed here for the ol’ portfolio.

The sector checks off a lot of the boxes I like. Stores have a local moat; many locations have controlled the underlying real estate for decades. The major players in the sector have a history of both dividend growth and share buybacks. Valuations are decent and earnings growth has been surprisingly robust. The large players can take advantage of the fragmented nature of the industry. And the sector is unloved, meaning the best operators are on sale.

Put it all together and it’s a nice combination for those of us who are interested in boring dividend growers.

Author owns Metro shares. No position in anything else mentioned, although I am thinking of buying one mentioned. Full portfolio is currently shared with premium subscribers, and will be shared with all subscribers starting in October. Stay tuned for that.