Ingles Markets: Squeezing Profits In The Age Of The Frugal Shopper

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Ingles Markets distinguishes itself in the Southeastern U.S. with a high-quality grocery selection and regional dominance.The company's growth trajectory has begun to moderate, with flat sales since ...

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Data by YCharts Turning our attention to margins, like its counterparts in the large grocery chain sector, Ingles Market operates with an intentionally low margin profile. This choice, reflective of the broader industry's competitive dynamics , underscores a cautious approach to prioritizing volume and market presence over immediate profitability. 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For some, it'll be Trader Joe's, others Costco (COST), or for those in Los Angeles with a penchant for $20 strawberries, maybe Erewhon is more your fancy. Where we shop can be impacted by many things; the price point, the quality, and the convenience of the location all come to mind. In today's article, I'll cover one such grocery retailer, a small company named Ingles Markets (NASDAQ:IMKTA). Ingles Markets distinguishes itself in the Southeastern U.S., especially within the Blue Ridge Mountain range of Georgia and the Carolinas, leveraging its regional dominance to fend off competition. A key aspect of Ingles' success is its high-quality grocery selection, which sets it apart from dollar stores and other low-cost competitors. This focus on quality, combined with a strong local presence, supports its competitive edge in a market niche that is relatively insulated from the encroachment of larger chains and e-commerce giants. Data by YCharts Due to its narrow focus on serving a niche market coupled with strong execution, Ingles has delivered excellent returns for its shareholders, nearly tripling over the past five years (up 174.4%). In today's article, we'll examine Ingles' track record of growth, and I'll opine on where I think the stock price may go from here. Steady Growth Data by YCharts Ingles' growth trajectory has begun to moderate, a shift from its previously strong historical revenue growth. Over the years leading up to 2023, the company successfully expanded its market share, particularly through strategic store openings in the Blue Ridge Mountains, which significantly contributed to increasing revenues from $3,836.0 million in 2014 to $5,880.5 million in 2023. Despite these achievements, the growth pace has shown signs of slowing down. Since 2023, sales have been flat; given the track record of rapid growth, I believe many investors are wondering where things will go from here. Can the growth continue? Well, I can't answer that question with certainty, but I do believe there are some clues... clues like its margin profile. Data by YCharts Turning our attention to margins, like its counterparts in the large grocery chain sector, Ingles Market operates with an intentionally low margin profile. This choice, reflective of the broader industry's competitive dynamics (read: fierce competition), underscores a cautious approach to prioritizing volume and market presence over immediate profitability. The company's apparent reluctance to aggressively pursue higher margins can be seen as a move to consolidate market share in a sector where consumer loyalty and pricing competitiveness are key. However, there could also be another reason for low margins: consumers are pulling back. While low margins are to be expected in the grocery business, it's troubling to see that all the margin improvement since COVID has been totally wiped out. Gross margins are now actually below where they were in 2019. This is a strong indicator that shoppers are pinching their pennies tighter and tighter.   IMKTA MacroTrends Looking at capital allocation for a moment, Ingles Markets has a taste for massive share buybacks, a strategy shared with companies like AutoZone (AZO) and Apple (AAPL). These companies are known for their large buyback programs, which have helped deliver strong shareholder returns. By reducing its share count from ~36 million in 2009 to ~24 million today, Ingles utilizes a tax-efficient method to return capital to shareholders through an increased share of ownership in the business. Some Big Risks: Market Saturation and Control   Ingles Annual Report Ingles Markets faces a notable risk in terms of market saturation within its current geography, as evidenced by the minimal net increase in store numbers—opening just two stores while closing one recently. With a total of 198 stores, the majority of which are large format, ranging significantly in size but with an emphasis on those at least 62,000 square feet, the room for expansion within its existing markets appears limited both due to the limited amount of land in the mountainous regions where they operate and the fiercely competitive nature of entering new geographies. The company's average store is over 57,000 square feet, roughly three times the size of an average Aldi. This has its pros, but it also has some cons. This choice, while beneficial in terms of offering a broad range of products and services, presents challenges in finding suitable new locations without overlapping with existing operations or facing logistical inefficiencies. The current situation suggests that Ingles might need to explore new alternative strategies for growth, considering the potential ceiling on expanding its physical retail footprint in preferred large formats within its traditional operational areas as evidenced by slower store openings. Another risk to monitor is the concentrated ownership of Ingles Markets, with Mr. Ingle II holding approximately 72.2% of the voting power, which is a factor investors should monitor. This ownership structure grants Mr. Ingle II substantial influence over key decisions, including the election of directors and the approval of major corporate actions, such as charter amendments or asset sales. While I believe this is not a significant risk given his track record, this level of control means any potential acquisition of the company would require the founding family's consent, possibly affecting the company's attractiveness to buyers and potentially keeping its valuation more modest than it might otherwise be. Other Long-Term Challenges Traditional grocers such as Ingles, along with industry counterparts Kroger (KR) and Publix, are navigating the competitive pressures brought on by the rise of private label giants Aldi and Trader Joe's. These challengers, leveraging their low price points, have made notable inroads in capturing the attention of U.S. consumers, particularly in the aftermath of the coronavirus pandemic. Since 2019, the US, and frankly most of the world, has experienced rapid inflation and supply chain shocks. Faced with increasing costs and higher uncertainty, consumers are shifting increasingly towards value options. Private-label-focused Aldi and Trader Joe's, with their smaller store formats, benefit from lower real estate costs compared to Ingles, which prefers expansive, large-format stores. In addition to lower rents and capital invested in real estate, the smaller formats increase the geographical possibilities for their expansion. This dynamic places Ingles in a position where its margins could be further squeezed if high inflation continues. In an attempt to counteract this, Ingles is revitalizing its stores, aiming to elevate its brand as a more premium option vis-à-vis Aldi and dollar stores. This pivot is designed to enhance Ingles' appeal to consumers by offering a differentiated shopping experience that aligns more closely with premium offerings than with the austerity of cost-leadership chains. While this may help them retain current customers, given the ongoing inflationary period, this author believes that \"slapping on a fresh coat of paint\" may not be enough, which is a big risk for profitability. Valuation         Company Current Stock Price EPS 2025 Est. 2025 P/E   IMKTA $76 $11.25 6.7   KR $57 $4.57 12.4   (ACI) $21 $2.62 8.0   (DG) $151 $8.25 18.3   (DLTR) $126 $8.19 15.3   Average PE (excl. Ingles) 13.5       Click to enlarge Turning to future earnings expectations, I am forecasting Ingles' earnings in 2025 to come in around $11.25. It boasts the lowest forward PE ratio at 6.7. This suggests that, on paper, Ingles offers significant value, potentially reflecting underappreciation by the market. This is especially true when compared to its peers like Dollar General, which has the highest forward PE ratio at 18.3, signaling a much higher valuation. However, it's worth noting that factors such as family control could be influencing Ingles Markets' valuation. This nuance could be one reason why Ingles' valuation is more conservative compared to its larger peers; despite its strong financial outlook, there is less M&A optionality due to family control. Data by YCharts Still, despite the recent pressure on margins, compared to its larger grocery peers, Kroger and Albertsons, Ingles' operating margins are still quite strong at 4.3% vs. 2.1-2.6%. And in defense of Ingles', they are not alone in facing weaker margins, but what is alarming is how steep and fast that deterioration has been. While its peers have also experienced some margin weakness, the speed and scale of that shift have varied. Conclusion Ingles Markets initially caught my attention with its low stock valuation, but when you dig a little deeper, you will find that there's a bit more to the story. The company's pace for opening new stores has taken a dip, which isn't great news for growth. At the same time, everyone's trying to stretch their dollar further, and that's putting the squeeze on Ingles' profits. Also, there's the family factor—the Ingles family holds a tight rein on the company, which might make investors a bit wary, keeping the stock price from climbing as high as possible. Considering these mixed signals—good value but some real challenges ahead—I think it's best to play it safe for now.  I rate Ingles Markets a Hold.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422061606"}