The Kroger (KR), headquartered in Cincinnati, OH, is one of the world's largest food retailers, with fiscal 2013 sales of $98 billion. Kroger spans many states with store formats that include grocery and multi-department stores, convenience stores and jewellery stores. This article discusses the reasons for being bullish in this retailer for long-term.
Kroger Is Growing At A Robust Pace
Over the last four years, Kroger’s revenue has increased at a CAGR of 6.5% from $76.5 billion in 2010 to $98.4 billion in 2013. The revenue growth has been healthy when one considers the fact that the company is operating in a consumer segment and competing with Wal-Mart (WMT). As a matter of fact, Wal-Mart has clocked revenue CAGR of 4.0% over the last four years.
The company’s revenue growth in the first quarter of 2014 has been even more robust with sales growing by 9.9% to $33 billion compared to $30 billion for the same period last year. A key positive in the first quarter report was the 42 consecutive quarter of positive identical supermarket sales growth. I like this number as it points to the fact that the company’s stores are increasing in popularity.
Strong Growth Will Continue
Another positive factor is the company’s bright outlook for 2014 and the management’s confidence of robust growth over the long-term. Based on the first quarter results, Kroger narrowed its adjusted net earnings guidance to $3.19 to $3.27 per share as compared to an earlier guidance of $3.14 to $3.25 per share. Therefore, the guidance has been revised on the upside and points to continued growth momentum in 2014.
Further, for the long-term, Kroger has guided for 8% to 11% diluted EPS growth. I believe that this is robust considering the revenue and earnings base of the company. Again, same store sales growth will be one key growth driver for the company. For 2014, the company’s guidance for same store growth is in the range of 3% to 4%.
From a shareholder value creation perspective, another important point to consider is the company’s strong share buyback program. Just for the first quarter of 2014, the company used $1.1 billion in cash to buy back shares. The company has repurchased shares worth $3 billion in the last three years and this point to the fact that Kroger is looking at more than one avenue for shareholder value creation.
More Than Just A Retail Store
Kroger is more than just a retail store and the company has been diversifying well in this aspect. As of December 2013, Kroger’s retail fuel operations included 1,240 supermarket fuel centres in 31 states and 725 convenience stores that sell fuel.
From $16.9 billion in 2011, the company’s fuel sales have increased to $19.0 billion in 2013 and it constitutes 20% of the company’s revenue. The addition of fuel segment provides additional value to consumers and also allows Kroger to leverage on its decade of experience of selling gasoline. I believe this is one of the factors contributing to steady same-store growth.
Kroger also happens to be the fifth largest pharmacy operator in the United States operating retail pharmacies in 1,947 of its retail locations. The merger with Harris Teeter brought an additional 159 pharmacies to the Kroger family.
As of 2013, the total pharmacy sale was $8.3 billion and it has grown from $6.9 billion in 2009. The pharmacy sales have also been strong and the key point again is the availability of multiple needs under one roof.
Kroger is more than just a food retail store and the company has been growing at a strong pace along with rewarding shareholders through share repurchase and increasing dividends. The company’s same store growth is a good indicator of an increasing popularity of the company’s stores.
Kroger's net total debt is $11.3 billion, an increase of $3.4 billion from a year ago, including debt related to the Harris Teeter transaction and Kroger's share repurchase activity. However, Kroger is focused on maintaining a strong financial discipline with a target of achieving a 2.0 – 2.2 net debt to EBITDA ratio by mid-to-late 2015. The recent increase in debt should not be a concern for a company with strong cash flows and focused on maintaining a strong financial discipline.
At a current stock price of $48.8, Kroger offers a dividend yield of 1.3%. I believe that the company is attractive from a dividend perspective as well and with 8% to 11% earnings growth likely, the dividend payout will increase in the years to come.
In terms of PE valuation, there is not much to choose between Kroger and Wal-Mart. While Kroger is trading at a PE of 16.8, Wal-Mart is trading at a PE of 15.9. What gives Kroger an edge is the fact that the company’s revenue and earnings growth have been relatively robust and will continue to be robust. My view is that investors can consider Kroger at these levels and on any broad market correction.