The Supermarket to Put in Your Shopping Cart
ROUNAK is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite a difficult competitive and consumer environment for conventional grocers, The Kroger Company (NYSE: KR) continues to perform well on the back of its Customer First strategy. Kroger is America’s largest grocery store operator and the fourth largest in the world. It improved its foothold by posting a strong set of third-quarter results making it the fourth straight quarter with positive earnings.
Stellar Numbers
Kroger reported stellar third-quarter revenues of $21.81 billion, up by 5.9% compared to the year before.
Share repurchase activities provided a cushion to the underside. Healthy results encouraged management to raise the outlook. The Cincinnati-based Kroger now envisions fiscal 2012 earnings between $2.44 and $2.46 per share, up from a range of $2.35 to $2.42 forecasted earlier. Over the past week all 12 financial estimates for 2012 have been revised upwards. The stock looks good with trailing 12-month return on equity (ROE) of 31.9%, much above its peer group average of 17.9%.
Competitive Peers
Speaking of competitors, Kroger’s competition comes from the retail monsters Wal-Mart (NYSE: WMT), Costco Wholesale Corporation (NASDAQ: COST) and Safeway (NYSE: SWY).
As for Wal-Mart the company’s Last quarter marked the fifth straight quarter that the company saw declining gross margins, as gross margin fell 0.1 percentage points to 24.9% from the year-earlier quarter. The stock appears expensive relative to the company's growth prospects. In my opinion the current stock price does not represents a smart entry opportunity and investors should wait for a pullback before establishing a position. For Wal-Mart to stay competitive it has to fight both online and offline competitors. It faces serious competition from Amazon with the growing online purchasing craze and in the offline sales deep discounters, like Target and Costco who are giving it a tough time.
Costco on the other hand continues to be a dominant retail wholesaler based on the breadth and quality of the merchandise it offers. However, its aggressive pricing to gain market share and coerce traffic amid stiff competition may depress sales and margins. I would recommend the stock neutrally as its overall growth in the past five years has only been 9%, way below the 15% mark that investors would like to see. On the margin front, Costco has only seen an increase of 12.4% in gross margins and a meager 1.5% increase in net margins. But over the past five years the stock dividend has grown 13.4%, indicating that things might get better in the future.
Safeway has lost 24% of its value this year, which isn't astonishing given the company's stubborn pricing strategy. It has been fighting its own financial woes. Unlike SUPERVALU, Wal-Mart, or Target, which offer their products at discounted rates, Safeway overcharges consumers for the same products.
Why Kroger?
Even though Kroger may not be able to beat giants Wal-Mart and Costco competitively, it does not need to do so in order to breed profitability. The company has enough scale to price competitively and generate profits higher than its cost of capital.
For the future, Kroger plans on implementing an expansion plan which entails store remodeling, new store openings and entering into new markets which are yet to be named. It also plans to increase its market share in the digital landscape as well using strategic ventures with technology companies like Dunnhumby. Moreover the company is exploiting the health care sector opportunity through its partnership with The Little Clinic.
Kroger continues to grow consistently, as it achieved its 36th consecutive quarter of positive identical supermarket sales growth. Its business model revolving around its consumers provides a strong value proposition to consumers and it is well positioned to continue its growth momentum predominantly through escalating supermarket sales.
The company is paying a decent dividend and the shares are valued at 10-11 times its earnings. Future forecasts look reasonably good as core revenue growth has been strong, and earnings growth is boosted by share repurchases done recently reflecting management’s confidence.
The Bottom Line
With a decent dividend yield, a notable guidance for 2012 and a long-term expected earnings growth rate of 9.1%, this stock offers a lucrative investment opportunity and I would recommend it a buy for investors who are seeking both growth and income in the long run. Analysts have been falling over each other to increase their target share prices, but still Kroger manages to better these estimates in its actual performance. Seeing this growth, I would advise to “hurry, till the stock lasts.”
rounakkhemka has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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!
