Retail Giants Banking Groceries

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

Even in bad economic conditions people cannot stop eating, thus The Kroger Company, (NYSE: KR) America’s largest grocery store operator is one company that has done well even in a recessionary economy. With the economy looking better and the company revealing a robust performance in its most recent results let’s see what it holds for investors.

Kroger reported its third quarter revenues at $21.81 billion, a growth rate of 5.9% as compared to the same quarter last year. The growth in revenue was mainly due to a 3.2% increase in identical supermarket sales. The reported net income for the company was $316.5 million which increased mainly due to the settlements of Visa and MasterCard.

Does Kroger’s Share Price Have Upside Potential?

The company’s stellar performance in the current third quarter and its consistent rise in revenues in the last four quarters have improved the full year’s guidance to $2.44 and $2.46 per share from $2.35 to $2.42 guided earlier. The company pays a good dividend every year and looks fairly valued at 10-11 times its earnings. Further Kroger seems to be trading at a discount as it trades at 0.15 price-to sales multiple while its peer trades at an average of 0.23. The trailing 12-month ROE for Kroger is 31.9%, handsomely above its peer group average of 17.9%.Thus the stock prices have potential to rise further.

A Look Around

Wal-Mart (NYSE: WMT) is the biggest name in the retail sector and has a great pricing advantage and tremendous foot-hold in the global market. The giant is trying to aggressively expand on its grocery business. Wal-Mart is looking to spend billions of money on price investments in the coming years with their focus mainly on fruits and vegetables. The company is also trying to venture into online shopping thus looking forward to invest in this prospective market (online shopping) and necessities (grocery). Wal-Mart appears a little expensive at the moment keeping the growth prospects for the company in mind but still remains a major threat for Kroger.

Though Kroger supposedly has the best loyalty program, Safeway’s (NYSE: SWY) new customer loyalty program can provide stiff competition. Safeway plans to offer discounts to its customers based upon past purchases. Another thing to be optimistic about Safeway (and a concern for Kroger) is its growing market share across all its outlets and even its food channels. The trend relating to its stock price has not been great and with its tremendous growth prospects the shares are trading cheap at 8.8 times its forward earnings. According to me Safeway is a good fetch with a price target of early 20’s.

Foolish Conclusion

Kroger adjusts well to the needs of the market and shoppers. As the divide between supermarkets, general retailers and dollar stores is reducing, Kroger is focusing on cheaper products and general merchandise too besides groceries. This well managed company is without doubt an excellent investment and share price appreciation should provide great returns. Safeway too is a promising stock and it is trading cheaper than Kroger on the basis of EV/EBITDA analysis making it a more compelling stock than Kroger. Both the stocks look good to me and given a choice on the basis of return potential I would choose Safeway.

snehladha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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