Why You Should Still Consider These Grocery Stores

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What's next for the grocery-store industry? With many of the constituents' stocks recently soaring to unforeseen levels, they appear to still have positive momentum. Investors can likely continue to benefit from climbing profitability, as well as the reinvestment of cash flow in the form of dividends and repurchases unfolding at these companies. A look at several, across a range of market capitalizations, should help to decide where to invest.

Investments in existing store base productive

Starting with one of the larger supermarket firms, Kroger (NYSE: KR) targets year-over-year sales growth of around 3%, supporting share-earnings expansion of 8% to 11%. It is enjoying the benefits of the remodeling of stores for a better shopping atmosphere. Accordingly, despite the counter-cyclical nature of the grocery business, marked by a potential loss of share to restaurants when discretionary spending rises, Kroger's results may well remain on an upward path.

The main story here, though, is financing cash flow. Specifically, Kroger this year is reducing its debt level, bringing down interest costs, as well as raising the dividend, and buying back a significant amount of shares, thus lifting share net. These measures are all in addition to capital expenditures for in-store features.

Kroger shares remain a good selection for yield and long-term price appreciation.

An expanding grocer carving out its niche

I have blogged about The Fresh Market (NASDAQ: TFM) previously, such as in a posting on June 10. It can be classified as a growth company that is still capturing market share at a considerable rate. The company added 15 units over the course of a year ending April 28, for a total of 131 locations. Plus, comparable-store sales advanced 3% in the latest quarter.

The company, marketing itself as a home-away-from-home with classic charm shop, offers a higher-quality mix of perishables along with a smaller format. Indeed, such grocers, along with those operating in the organic-food sector, are gaining ground on the major chains, reflecting consumer preferences toward health and convenience.

The stock's premium value (the shares were trading at nearly 27x forward share earnings, based on current-year share net of $1.57) is warranted, given its stellar prospects. Investors may profit as The Fresh Market expands beyond its current 25-state presence.

This North Carolina-based firm is on the block. 

When this grocer, Harris Teeter Supermarkets (NYSE: HTSI), announced in February that it is considering a sale of the company, investors did not take much notice. Around the same time, Supervalu divested several of its affiliates to a private equity group. It is not as if the company is not performing well, as share earnings rose to $0.67 from $0.62 in the latest quarter. Thus, speculation of a buyout might not be the only incentive to purchase shares of this North Carolina-based chain.

Although its headquarters are in North Carolina, store expansion of late has largely been focused on the Washington, D.C./ Virginia region. It has also sold some locations, while remodeling and replacing less profitable stores. In all, it is realizing sales growth, while maintaining the operating margin.

The stock has reached an all-time apex, probably a reflection of its positive comps, while it revitalizes the store base. Accordingly, the likelihood of a sale has dimmed, and Harris Teeter shares are also best viewed as a growth investment (Forward P/E 18.1x, fiscal 2013 (September) earnings per share estimated at $2.42).

A 2013 IPO attracting buyers

Shares of Fairway Group (NASDAQ: FWM)) have gained further price momentum since I listed them as one of my favorite IPOs of 2013 in a recent blog. Currently operating only a handful of stores in the New York-metropolitan area, management believes the company can expand throughout the Northeast, possibly to around 300 locations, eventually.

As the store base expands, and the distribution system is in place, margins ought to widen substantially. It is likely that the concept, convenient and high-quality, similar to The Fresh Market, will take hold in the region to a greater extent.

Fairway shares are an investment in that operating model and the belief that it will attract a broader consumer contingency, as health food and convenience trends continue to gain acceptance. It is a good selection that offers considerable price upside, particularly if the company can expand profitably.

Summary

Supermarkets are historically some of the most consistent and favorably yielding stocks. Currently, as their prices have climbed to new heights, the investment community is apparently emphasizing their potential for growth. No longer priced as takeout candidates, the companies should be coveted as cash-strong entities.  

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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