Market Winners And Losers As Food Deflation Persists

While consumers have benefited this summer from continued deflation in food prices, investors in food retailers have been starving for returns.

From grocers like SUPERVALU INC. (NYSE: SVU), which cut guidance Thursday, to restaurant chains including industry giant Darden Restaurants, Inc. (NYSE: DRI), which saw its stock dip 4 percent after issuing a dismal outlook, all have been caught up in what's being called a "price war".

Grocery margins are slim enough, but low prices on meat and other food commodities are pushing the values of their inventory lower and lower. Some have to absorb the pain of promotional pricing in order to move that inventory before even lower priced stock arrives. Even when sales volumes increase, reported revenues and profits can diminish in some categories due to the drastic price drops.

Related Link: Food Deflation Is "Great" For Consumers But "Terrible News" For Grocery Chains

All this may seem like it would bode well for restaurants. Consumer savings on staples should mean an increase in discretionary spending on experiences like dining out, and lower cost of goods sold should lead to expanding profits, right? This has largely not been the case.

The problem seems to be that it's becoming so inexpensive to eat at home that restaurants find themselves having to compete on price. Recent consumer price index (CPI) data from the Bureau of Labor Statistics cites food at home prices decreasing as food away from home rose. Restaurant traffic forecasts are broadly lower. Check out Benzinga Pro's recent round-up of same-store sales guidance cuts from the summer below.

Some practical guidelines for food stock enthusiasts going forward:

• Restaurants still seeing increases in foot traffic might be preferable. Texas Roadhouse Inc (NASDAQ: TXRH) executives, in their Q2 earnings conference call, credited comp sales growth and commodity deflation with significant margin expansion. While Texas Roadhouse shares fell after they reported a revenue miss, they've still outperformed the likes of Darden and BJ's Restaurants, Inc. (NASDAQ: BJRI) year-to-date.
• Consider food retailers with a diverse enough product mix to protect them off the front lines in the price war. Wal-Mart Stores, Inc. (NYSE: WMT) and Costco Wholesale Corporation (NASDAQ: COST) are examples. Wal-mart reported a beat-and-raise for Q2, and although Costco shares were punished after the discount club company saw its Q4 sales miss expectations, BMO analyst Kelly Bania in a note Friday encouraged investors to stay bullish on the name, as it is "less exposed" to food deflation than its peers.
• Finally, suppliers widely considered "best-in-class" may see their real estate on store shelves maintained, or even expanded, buy grocers looking to focus on product that'll contribute the most to their bottom lines. Look at the year-to-date performance of Kraft Heinz Co (NASDAQ: KHC) and Tyson Foods, Inc. (NYSE: TSN), up 23 and 41 percent, respectively.

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