The Yolk’s on You

When the headlines blare that food inflation eased last month, The Juice likes to take a second, deeper look. Because, as with housing, price drops don’t necessarily mean an end to the insanity and a return to relative affordability.  

For example…

• The cost of eggs fell 6.7% in February. 
• But this drop comes after an 8.5% increase in January. 

When we walk the aisles of major supermarket chains here in Southern California, we can’t find a dozen eggs for less than $4.99. 

Milk isn’t too far behind, with its cost increasing 0.2% in February. 

Persisting sticker shock on these and other staple items continues to push consumers to buy more private-label brands and shop at discount stores. 

Consider this comparison on a dozen large eggs: 

• At Pavilions (an imprint of Albertsons (ACI)), they cost $4.99. 
• At discounter Target (TGT), you can snag a dozen for between $3.59 and $4.29, based on our research and depending on location. 
• At deep discounter Dollar General (DG), you’ll pay between $2.70 and $3.35, again depending on location. 

Dollar General reports earnings tomorrow. We’ll listen to the call and report back Monday morning with what the company sees on the ground in its business. As DG continues to open more stores, including number 19,000 this January, we’re excited to see how its aggressive push into grocery items is going. 

We guess it’s going well. 

Because there’s a big difference between $5 and $3 eggs to a family on a budget. 

And the pain doesn’t stop with eggs. As government data shows, year-over-year increases in food costs continue to outpace other key areas of life. 

There isn’t a major difference between eating at home or eating out:

The data shows prices remained flat on most food items between January and February. And where there was an eye-catching decrease (as with eggs), it either followed a big spike in January or was basically offset in another area. 

Some more examples:

• The cost of breakfast cereal dropped 1.1% in February, but it’s still 12.5% more expensive this year than it was last year. 
• Butter and margarine are down 1.0% month to month, but up a whopping 26.9% annually. 
• Food away from home at limited or fast-casual establishments actually went up 0.7% month to month and is up 7.2% year over year. 

So for people pinching pennies, any talk of cooling prices offers little relief.

The Bottom Line: Despite flat or lagging stock prices over the last year, The Juice stands by our long-term thesis on DG and competitor Dollar Tree (DLTR). Both stocks have outperformed the broad market, middle-of-the-road discounters such as Target, and large grocery chains like Albertsons. 

Source: Google Finance

It’s because of the pressure on middle- to low-income consumers and DG and DLTR’s role in helping alleviate it.  

We don’t expect the screws to loosen anytime soon, so we remain bullish on shares of DG and DLTR for long-term investors, particularly as both stores get even more aggressive about offering groceries at relatively low prices.

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