Extra low prices bag supermarket stocks.

• Author: Scheer, Lisa
• Position: Grocery stocks

At Food Lion Inc.'s annual meeting in May, shareholders were required to write down their questions for CEO Tom Smith on note cards. After 30-some questions and answers, Smith announced he was out of cards and ready to adjourn the meeting. At least a dozen people, including the daughter of company co-founder Ralph Ketner, objected, saying their questions hadn't been answered. Oops, Smith said, apparently some cards had been lost.

But it's not just Food Lion investors who have a lot of unanswered questions these days. With consumer confidence still low, shoppers are trading down to lower-priced, low-margin products. Stores are slashing prices in the face of increased competition from Kmart's Pace Membership Warehouse, Wal-Mart's Sam's Warehouse Club and others. As margins shrink, the No. 1 question is which grocers can best weather this tough climate. Analysts say the three publicly held North Carolina supermarkets might offer some investment opportunities.

But most stock pickers think it's too soon to load up on shares of Food Lion (FDLNB-NASDAQ), which has lost more than $5.8 billion in market value since its stock peaked at $18 in December 1991. Headquartered in Salisbury, the 1,034-store chain is the second-biggest in the Southeast after Jacksonville, Fla.-based Winn-Dixie Stores. Fallout from ABC-TV's Primetime Live expose last November, which purported to show employees engaging in unsavory practices to save money, continues to depress both sales and the stock, which has traded in the $7 range in recent months. (Food Lion also has a Class A nonvoting stock.)

Last year, Food Lion reported net income of $178 million on revenues of $7.2 billion, a net margin of 2.4%, compared with 3.2% in 1991. That's still better than an industry average of around 1%, but the rapid decline is alarming. For the first quarter, Food Lion's net income fell to $21.9 million, or 5 cents per share, from $49.6 million a year earlier.

Analyst Guy W. Ford of Scott & Stringfellow in Richmond thinks Food Lion's problems run deeper than bad press. Operating profits last year were already under pressure because of tough economic and competitive conditions. Plus, Ford says, there's a black cloud hanging over its unprofitable Texas operations. Food Lion entered Texas two years ago and anticipates having 80 stores there by the end of this year.

"Food Lion budgeted for Texas and the Southwest to be a major growth avenue, and they've run into a buzz saw down there -- just...