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Kroger Expects Its Strategies to Help It Increase Sales

April 09, 2014 | About:

The Kroger Co. (KR) operates retail food and drug stores, multi-department stores, jewelry stores and convenience stores. One hundred thirty years ago, Barney Kroger opened his first grocery store in Cincinnati, and now is the nation's largest traditional grocer, with more than 2,400 stores under multiple banners across the country. As of Feb. 2, 2013, the company operated, either directly or through its subsidiaries, 2,424 supermarkets and multi-department stores, 1,169 of which had fuel centers. In addition to the supermarkets, as of Feb. 2, 2013, the company operated through subsidiaries, 786 convenience stores and 328 fine jewelry stores. In addition, 81 convenience stores were operated through franchise agreements.

So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

New Products & National Brands

The company launched almost 1,000 new products in fiscal 2013. New products in the past years have included Greek yogurt, pet treats, salty snacks, health and beauty care items, vitamin-enhanced water, and key perishable segments. "Our focus is on new products, which are continually evolving as customer tastes change," says W. Rodney McMullen, president and COO. Additionally, the company´s strong corporate and national brands helped gain customers loyalty. Its Simple Truth, Private Selection, Banner and Value brands comprise a multitier corporate-brand strategy that generates strong profit margins.

Customer 1st Strategy

Kroger's four keys of its customer first strategy are their people, their products, the shopping experience and the prices. With this strategy the firm focuses efforts on improving employee communications and training; boosting customer loyalty by improving customers' shopping experience; and pricing within an acceptable range of discounters'prices so that price becomes a neutral factor in customers' shopping decisions.

Acquisitions

The company acquired Axium Pharmacy Holdings, a provider of brand-name and compounded pharmaceutical products. Moreover, Kroger acquired regional grocer Harris Teeter Supermarkets for $2.44 billion in cash. The transaction between the two companies was completed on Jan. 28, 2014. The transaction allows Kroger to expand with the prestigious Harris Teeter brand and a base of 227 stores in the fast-growing and attractive Southeastern and mid-Atlantic markets and in Washington D.C. Finally, the management projects capex at around $3 billion for fiscal 2014.

Dividends & Share Repurchases

Looking at the financials, the company has a strong balance sheet: good cash that allows it to announce last year a 10% hike in its dividend payout of $0.165 per share, reflecting a dividend yield of 1.48%, and to return over $928 million to stakeholders via dividends and share repurchases in fiscal 2013.

Analyst Recommendation

The firm is currently Zacks Rank # 2–Buy, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 19%, which is attractive for investors.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 14.9x, trading at a discount compared to the industry mean. Earnings per share (EPS) decreased by 8% in the most recent quarter compared to the same quarter a year ago, to $0.81 per share for fourth quarter fiscal 2014.We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last year.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year prior, but it is still a good one. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

KR

Kroger

35.58

CBD

CompanhiaBrasileira De Distribuicao

12.37

SPTN

Spartan Stores, Inc.

8.17

MAKSY

Marks & Spencer Group PLC

18.77

CRRFY

Carrefour

14.75

As we can see, the firm has a higher ROE than Companhia Brasileira De Distribuicao (CBD), Spartan Stores Inc. (SPTN), Marks & Spencer Group Plc (MAKSY) and Carrefour (CRRFY).

Final Comment

The company has a dominant position while expanding its store base, and is gaining market share by introducing new products, which are key drivers for long-term profitability. We think that the company will boost its earnings growth by the development of the Customer 1st strategy and its share repurchases activities.

I would recommend investors to add Kroger to their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter of 2013. Gurus like Ray Dalio (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have bought the stock.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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