How to Invest in the Grocery Business

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

Kroger (NYSE: KR) is one of the largest supermarket chains in the United States, with over 2,400 locations totaling about 150 million square feet.  The company has done very well over the past decade, nearly doubling its revenues in that time (see below).  With increasing competition, especially from giant discount stores who more and more are adding full grocery stores, is now a good time to buy Kroger, or should investors stay away?

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Kroger is mainly known as a supermarket operator, however the company also operates convenience stores under such names as Kwik Shop, Quik Stop, Tom Thumb, and others.  The company also operates 348 jewelry stores, making it one of the country’s largest jewelers, with such names as Barclay Jewelers and Littman Jewelers. 

The company’s main strategy is to grow same-store sales by providing a better customer experience than its competitors.  They intend to do this by improving convenience and accessibility as well as store cleanliness, reducing checkout times as much as possible.  The company fully recognizes that it is unable to completely price-match with discount giants such as Wal-Mart (NYSE: WMT), so the plan is to get the prices close enough so that price is no longer a major factor in customers’ decisions on where to shop.

Speaking of Wal-Mart, they could be considered a very direct competitor to U.S. grocery stores such as Kroger, since 55% of Wal-Mart’s sales are derived from its grocery business, or $145 billion of its revenues.  Compare that to Kroger’s revenues of just under $100 billion, and you can see just what a tremendous competitor Wal-Mart is. 

If you are looking for exposure to the grocery business, which remaining as diversified as possible, Wal-Mart may be a good bet.  The stock currently trades for just 14 times earnings with a 9% forward growth rate projected, which looks pretty good for such a  large, stable company.

Valuation

On the topic of valuation, Kroger is expected to report fiscal year 2013 earnings of $2.46 per share when it releases its results on March 7.  So, Kroger trades for just 11.7 times earnings, which are expected to grow to $2.64 and $2.93 in fiscal years 2014 and 2015, respectively, or an average forward growth rate of 9.2%. 

Compared to Wal-Mart, Kroger looks very attractively valued.  However, Wal-Mart is perceived by the market to be much less risky of an investment, which generally warrants a higher valuation.  Let’s see how Kroger compares to another large grocery chain.

Safeway (NYSE: SWY) is a grocery retailer with almost 1,700 stores, primarily in the west and mid-Atlantic regions.  Safeway is a slightly smaller company than Kroger with revenues of approximately $45 billion annually. However as far as publicly traded grocery chains go, they are about the closest comparison to Kroger in terms of both size and geographical footprint.

Safeway trades at just 10.5 times current fiscal year earnings of $2.15 per share, making it look cheap at first glance.  However, earning are actually expected to contract this year by 3.7% before rising by 7.2% the following year.  Declining revenues, even temporary, are generally a red flag.

Conclusion

To sum it up, if you want low-risk, Wal-Mart (or one of the other giant discount retailers) is probably the way to go if you want exposure to the grocery business.  However, if you want a pure grocery play for your portfolio, Kroger is very attractively valued and growing nicely, making it worthy of your consideration.


KWMatt82 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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