A sell-side analyst and an independent researcher are divided in their views of grocery retailers as bondholders prepare for Tuesday's second quarter earnings call from The Kroger Co.--the last of the top three issuers in the sector scheduled to report. Dave Novosel, head of research at Banc One Capital Markets, is looking for Kroger to show pressure on both sales and margins, just as rival Albertsons did earlier this month. Kroger's 5.5% notes of '13 were bid at 103 basis points over 10-year Treasuries last Tuesday. Novosel says he would be a better buyer of the Safeway Inc. 5.8% notes of '12, which were bid some 10 basis points wider, adjusting for their longer maturity. Novosel says they should trade flat to each other. He also sees all three names backing up some five to 10 basis points by year-end, assuming, as Banc One does, that overall corporate spreads will remain flat during that same time period.
Despite the less-than-impressive numbers, some see larger retail trends giving a lift to the food-based stores. Suzanne Foley, analyst at CreditSights, points to Wal-Mart Stores' recent pickup in same-store sales as one sign that the consumer may be gaining strength. She sees the potential for modest spread-tightening throughout the sector. While management changes at Albertsons have yet to impress her, she still sees the possibility for a turnaround, and says she would recommend Albertsons' bonds if they return to trade 30 to 40 basis points wide of Kroger, as they have done in recent weeks.