Deutsche Banc Alex. Brown's Jonathan Ziegler rolled out research coverage of the U.S. Food Retail industry late last week with the initiation of 10 supermarket companies. Shares of Albertson's Inc. (ABS -- $35.50), Safeway Inc. (SWY -- $46.13) and Whole Foods Market Inc. (WFMI -- $38.13) were started with an investment rating of STRONG BUY, while shares of Costco Companies Inc. (COST -- $30.00), Delhaize America Inc. (DZA -- $17.25), The Kroger Co. (KR -- $19.38) and SuperValu Inc. (SVU -- $20.94) were initiated with a BUY investment rating. Smart & Final Inc. (SMF -- $8.31), Wild Oats Markets, Inc. (OATS -- $9.44) and Winn-Dixie Stores, Inc. (WIN -- $15.81) shares were started with an investment rating of MARKET PERFORM.

After outperforming the market in the five-year period through 1998, the group under-performed the S&P 500 during 1999, falling 22.1% versus a 17% gain in the index. This caused a contraction in the group's valuation multiple from a high of 28.4x in December 1998 to 17.2x today.

"We believe the group is favorably positioned for a recovery in valuation, which along with its potential for mid-teen EPS growth of around 14%, could provide exciting return to investors," said Ziegler.

Ziegler's favorable outlook for the U.S. grocery industry is based on four key themes:

1. The industry is defensive in nature, which should benefit the group given the current disruption in NASDAQ stocks and implications of a slowing economy;

2. Supermarkets are a major play on applied technology since information is as important as product in the industry. The application of modern technology to current business practices should lead to dramatic improvements in margin and could result in more rapid sales and earnings growth;

3. The consolidation movement continues despite significant consolidation at the end of the 1990s. However, the hiccups of integration are largely behind the food retailers and have given rise to powerful management expertise and skill-sets for application in future deals; and

4. The grocery retailers are in the early stages of building brand, which is reinforced through consolidation, private label programs and e-commerce initiatives. The use of these brands should enhance the retailers' ability to generate revenue.


Deutsche Banc Alex. Brown identifies the U.S. investment banking activities of DB Alex. Brown LLC and Deutsche Bank Securities Inc., which are indirect subsidiaries of Deutsche Bank AG. With over $869 billion in assets as of September 30, 1999 and approximately 90,000 employees, Deutsche Bank offers its clients unparalleled financial services throughout the world. It ranks among the leaders in asset management, capital markets, corporate finance, custody, cash management and private banking. Deutsche Bank is divided into five major business units: Global Corporates and Institutions, Global Technology and Services, Asset Management, Corporates and Real Estates and private and Retail Banking.

Deutsche Bank Securities Inc. maintains a net primary market in the common stock of Albertson's Inc., Costco Companies Inc., Delhaize America Inc., The Kroger Co., Safeway Inc., SuperValu Inc., Winn-Dixie Stores, Inc. and Whole Foods Market, Inc.

Within the past three years, Deutsche Bank Securities Inc. or its wholly owned subsidiary, DB Alex. Brown LLC, has managed or comanaged a public offering of The Kroger Co., Safeway Inc. and Whole Foods Market, Inc.

Albertson's Inc., Costco Companies Inc., Delhaize America Inc., The Kroger Co., Safeway Inc., SuperValu Inc., Wild Oats Markets, Inc., Winn-Dixie Stores, Inc. and Whole Foods Market, Inc. stocks are optionable.

Costco Companies Inc., Delhaize America Inc., The Kroger Co. and Whole Foods Market have convertible issues outstanding.

An author of this comment has a long position in the common shares of Smart & Final.

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