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Stock Strategist Industry Reports

Wholesale Clubs: Membership Has Its Privileges

Investors should own firms able to deploy gas or food as a loss leader.

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Two basic staples, food and fuel, are eating a greater share of household budgets with prices growing at a faster rate than consumers' wages. Investors seeking to limit downside risk in the consumer defensive sector should own firms with business models that have the ability to deploy these inelastic products as category loss leaders.

Our moat analysis finds that companies able to use gasoline or food as a product loss leader have the least relative downside risk in an excessive inflationary environment. We believe wholesale clubs are the best positioned when food and fuel costs begin to strain consumer budgets, followed by the dollar stores and then the supercenters. Not withstanding current valuations, we find companies in these subsectors have the least risk to a decreasing denominator in any valuation multiple, because same-store sales (excluding fuel) increase when gas prices rise dramatically. With the exception of  Whole Foods (WFM) and  Kroger (KR), which also maintain or increase customer traffic when gas prices rise, we believe traditional grocery store operators are the most vulnerable.

Morningstar Analysts does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.