A Power Packed Rally in Store for This Stock

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

Good economy or bad economy, people need to consume, which makes the demand for consumer goods pretty stable. This rationale has always presented a bullish picture for the consumer goods industry and grocery stores. However grocery stores can grow faster than consumer goods companies, as their growth is mainly driven by efficient space utilization and store additions. 

The Health Impact

All over the world people are realizing the importance of a healthy eating lifestyle, and fast food chains like McDonald's (NYSE: MCD) have lost significant market share. Though McDonalds is rapidly expanding its operations in China, and operates over 14,000 stores, its shares have declined by nearly 11% over the last year. This is primarily due the paradigm shift towards healthier foods, which has resulted in lower same-store sales.

The management of Kroger (NYSE: KR) seems to be doing it right. The company recently launched its “Simple Truth” and “Simple Truth Organic” brands, and according to the management, these offerings are “free from the 101 artificial ingredients and preservatives.” The newly launched products have been well received by the consumers, and have become the fastest growing segment for the company.

Expansive Drive

Moreover, the management of Kroger announced that it will be acquiring Axium Pharmacy to boost its drug offerings. Customers would now be able to receive complex specialized drug therapies, and Kroger will now have larger line-up of drugs and treatments. This would help boost its revenues and would also place Kroger as a specialty drug therapy chain.

The management also announced that its same store sales and customer frequency per store has risen and that it would be expanding or relocating 400 of its stores by the end of 2012, and 50 stores in 2013. It’s for this reason that its FY12 capital expenditures are projected between $1.9 billion and $2.2 billion.

Solid balance sheet

Even though the company reported a modest 3.2% growth in sales (excluding fuel), the Street was impressed with the results. Its quarterly capital expenditures, excluding acquisitions and purchase of leased facilities, stood at $473.5 million, down by 4.7% on a YoY basis

<img src="http://media.ycharts.com/charts/3ea9ec733d7ec91a48dbfa7bab846198.png" />

KR Net Income Quarterly data by YCharts

From the chart above we can see that over the last 3 years net income has risen more than its revenues, expenses, and liabilities. This not only indicates solid top line growth, but also strengthening margins. The management expects Q4 sales growth to be between 3%-3.5%, and remains optimistic about the acquisition of Axium Pharmacy.

Investor’s delight

The company has also been repurchasing its shares. In Q3 2012 Kroger repurchased $333 million worth of 14.5 million shares from the market. According to management, in the last 4 quarters Kroger has returned $1.7 billion to its shareholders via buybacks and dividends. Earlier this year, its board had also approved a share buyback program worth $1 billion, out of which a major chunk still remains. These buybacks would continue to support its price, boost its EPS growth, and bolster its dividend yield of 2.27% with a modest payout of 36.7%.

Wrap Up

However, not all grocery chains seem to be doing it right. Supervalu (NYSE: SVU) has been reporting losses, and analysts expect its EPS to shrink by 10.7% over the next year. Its shares have plunged by nearly 50% over the last year. Moving to another competitor, Safeway (NYSE: SWY) has been shutting down stores, which has negatively affected its bottom-line. In a matter of 2 years its store count has reduced by 47, and the trend is still expected to continue. Its shares have declined by 17.5% over the last year, and in my opinion investors should stay away from this one as well.

I believe that Kroger has a strong set of fundamentals with a solid balance sheet, which will help to continue its rally. The management is competitive, and its store expansions, Axium acquisition, and entry into healthy foods ensure that Kroger will be heading north. Moreover, its dividend yield is attractive, which is why Kroger gets a Foolish Buy rating.

PiyushArora has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's and Supervalu. 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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