6 Companies Battling for Americans' Grocery Money (Update1)

(Story updated to add that Target reported same-store sales in March rose 7.3% and also raised its first-quarter guidance.)

BOSTON ( TheStreet) -- Consumer-staples retailers are undergoing abrupt changes to their industry. The latest example is the battle over Americans' grocery purchasess being waged by traditional supermarkets, dollar-discount stores, big-box department stores and wholesale clubs.

The fight has grown heated as more retailers of decidedly different stripes are offering refrigerated food products and, in some cases, prepared and fresh foods, which is contributing to a shift in buying habits.

"The latest trend shows consumers making more trips to drug, club and dollar stores, while cutting back on trips to Wal-Mart ( WMT) and traditional grocery stores," said Joseph Agnese, an S&P Capital IQ analyst.

And that put a chill into Wal-Mart, the nation's largest grocer. The company said last week it will spend $1 billion this year to cut prices on such goods and is considering allocating another $1 billion to reducing prices next year.

The strategy behind this grab for groceries is based on the premise that customers coming in to, say, a discount store for the reduced costs on one product segment or to a drug chain store to pick up a prescription, will then fan out to other parts of the store and buy groceries, given the convenience, and then maybe make an impulse purchase of higher-profit items.

"Consumers today shop a multitude of formats based on need," Agnese said. "There are many types of trips consumers make, from convenient fill-in trips, such as to a dollar store or drug stores, to one-stop shopping to stock-up trips at traditional supermarkets and clubs.

"The struggle today is to maximize share of wallet by trying to fulfill as many of the consumers' needs as possible and to do it well," Agnese says of the different types of consumer staples retailers.

"For supercenter operators, such as Wal-Mart and Target ( TGT ), food is the customer magnet that sharply increases the store's overall sales volume, taking customers away from traditional grocery stores," he said.

And now "dollar stores are adding consumables, especially frozen food, in an effort to drive traffic into stores," said Agnese, referring to companies such as Family Dollar Stores ( FDO).

Wal-Mart has been hurt by this, hence the aggressive move to cut prices to gain back store traffic after its disappointing results in its most recent fiscal quarter ending in January. It reported that U.S. comparable-store sales grew only 1.5%, below analysts' estimates of 1.8%, despite the start of the price-cutting strategy. That prompted S&P to cut its rating to "buy" from "strong buy" on its shares in expectation of slow earnings growth on the year.

In contrast, Target reported that February same-store sales grew a huge 7%, after increasing 4.3% in January.

But it was Wal-Mart that fired the first shot in this grocery battle beginning in the 1990s, essentially incorporating a supermarket within its traditional department store concept. And now Target is making a major push into fresh foods with its "P-Fresh" program, which it now has in 875 stores and is expanding rapidly.

The losers in all this have been the traditional supermarket chains such as Safeway ( SWY) and Supervalu ( SVU), with the noted exception of Kroger ( KR), which has managed to differentiate itself by selling gasoline cheaply, and, since it has a manufacturing unit, making and selling its own store brand products.

"In contrast to its peers, Kroger has been able to withstand the relentless competitive incursion from non-traditional food retailers, and not only defend, but increase, its market share," Morningstar says.

Wal-Mart is already the country's biggest grocer, selling $145 billion of such goods in the U.S. in 2011. That accounts for 55% of its total U.S. sales, compared with 53% a year earlier, according to its latest annual report, filed Tuesday.

Club stores, which appeal to those buying in bulk, and include Wal-Mart's Sam's Club, Costco Wholesale ( COST) and privately held BJ's Wholesale Club, are holding their own as group in the groceries market battle, although Costco is a leader in the members-only, club stores sector.

Here are six consumer staples stocks with a varied mix of retail approaches to selling groceries, ranked in inverse order of the number of analysts' "buy" ratings:

6. Family Dollar Stores ( FDO)

Company profile: Family Dollar Stores, with a market value of $7 billion, operates about 6,800 general merchandise discount stores in 44 states. They offer a variety of apparel, food, cleaning supplies, beauty and health products, toys, pet products, and seasonal goods, typically at prices from under $1 to $10. The chain targets low- and middle-income consumers.

Dividend Yield: 1.32%

Investor takeaway: Its shares are up 10.5% this year, including 17% in the past month, and have a three-year, average annual return of 27%. Analysts give its shares five "buy" ratings, six "buy/holds," 15 "holds," one "weak hold," and two "sells," according to a survey of analysts by S&P. S&P says that Family Dollar "has significantly expanded its food assortment with a focus on refrigerated foods, as well as quick-prep and ready-to-eat products, to drive its sales."

5. Dollar Tree ( DLTR)

Company profile: Dollar Tree, with a market value of $11 billion, offers a variety of consumable merchandise, including candy and food, general merchandise such as toys and gifts, and seasonal goods -- all for $1.

Dividend Yield: None

Investor takeaway: Its shares are up 15% this year and have a three-year, average annual return of 50%. Its shares are up 69% in the past 12 months. Analysts give its shares eight "buy" ratings, five "buy/holds," 10 "holds," and one "weak hold," according to a survey of analysts by S&P. S&P has a "sell" rating on it based on valuation concerns, otherwise it's upbeat on its outlook.

Dollar Tree has benefited significantly from the prolonged recession and the challenge it faces now is whether it can hold on to customers as the economy improves. In its current fiscal year, it's expected to earn $4.95 per share and that that will grow by 13% to $5.60 next year.

4. Costco Wholesale ( COST)

Company profile: Costco, with a market value of $39 billion, is the third-largest retailer in the U.S. and the ninth-biggest retailer in the world, with more than 430 warehouse clubs in the U.S and over 80 in other countries.

Dividend Yield: 1.04%

Investor takeaway: Its shares are up 8.8% this year and have a three-year, average annual return of 24%. Analysts give its shares eight "buy" ratings, four "buy/holds," 13 "holds," four "weak holds," and one "sell," according to a survey of analysts by S&P. For 2012, analysts estimate it will earn $3.86 per share and that that will grow by 13% to $4.36 per share next year.

While S&P has it rated "hold," Morningstar analyst Peter Wahlstrom is upbeat on Costco, saying the company "is poised to capture incremental market share from other retail channels as consumers still look for ways to stretch their budgets during a post-recessionary environment."

3. Kroger ( KR)

Company profile: Kroger, with a market value of $13 billion, operates about 2,500 stores in 31 states, as well as convenience stores, jewelry stores, supermarket fuel centers, and food processing plants.

Dividend Yield: 1.94%

Investor takeaway: Its shares are down 1.6% this year and have a three-year, average annual return of 5%. Analysts give its shares nine "buy" ratings, two "buy/holds," seven "holds," and four "weak holds," according to a survey of analysts by S&P, while S&P has it rated "sell," because of Wal-Mart's launching a new low-priced strategy in the fall of 2011" which puts Kroger's operating margins under pressure and makes it tougher to defend market share.

But Morningstar is upbeat on Kroger and says that it "is the only traditional grocery store operator to consistently generate returns above its cost of capital. In contrast to its peers, Kroger has been able to withstand the relentless competitive incursion from nontraditional food retailers, and not only defend but increase its market share. The company has delivered positive identical-store sales excluding fuel for 29 consecutive quarters."

2. Wal-Mart ( WMT)

Company profile: Wal-Mart, with a market value of $205 billion, is the largest retailer in the world with almost 10,000 stores internationally.

Dividend Yield: 2.6%

Investor takeaway: Its shares are up 2.2% this year and have a three-year, average annual return of 6.2%. Analysts give its shares nine "buy" ratings, four "buy/holds," 18 "holds," and one "sell," according to a survey of analysts by S&P. S&P has it rated "buy," with a $67 price target, a 10% premium to its current price.

But Morningstar analysts say a "fair value" estimate is its current $61 per share because the company is being hurt by the protracted impact of the recession on its low-end customers. It said that comparable-store sales at "U.S. Wal-Mart stores are now negative on a two-year rate basis, and have been for the last 12 months. Whatever Wal-Mart's pricing strategy is, it's not driving sales."

1. Target ( TGT)

Company profile: Target, with a market value of $38 billion, operates 1,515 discount stores, including 875 with P-Fresh sections featuring expanded grocery lines; and 252 SuperTargets.

Dividend Yield: 2.07%

Investor takeaway: Its shares are up 13.6% this year, and have a three-year, average annual return of 18%. Analysts give its shares 11 "buy" ratings, six "buy/holds," and 10 "holds," according to a survey of analysts by S&P, which upgraded it to "strong buy" rating on April 2, and raised its price target to $72, from $57, and said that including the costs of entering the Canadian market, "we believe investors will be more willing to look past near-term earnings dilution in valuing (its) shares."

Target reported that February same-store sales grew a huge 7%, up from 4.3% in January and much higher than December's 1.6% increase. The company reported Thursday that its same-store sales in March rose 7.3%, much better than expected, and as a result, raised its first-quarter guidance to between $1.04 and $1.10 per share, up from the previous $1.07 per share view.

>>To see these stocks in action, visit the 6 Companies Battling for Americans' Grocery Money portfolio on Stockpickr.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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