Kroger’s (KR, Financial) stock price has been declining at such a rapid pace that you might think sales are dropping at a much faster rate than they actually are. The stock has lost one-fourth of its value since the start of this year, declining from above $40 in January to the $30 level.
The truth is, for the last three quarters the company’s sales growth read 4%, 4.7% and 6.5%. Not a bad growth rate for a company with more than $109 billion in annual sales last fiscal.
As sales kept growing, Kroger’s stock has kept moving south. There aren’t many retailers who have posted above 4% growth this year but even then the market seems to be expecting Kroger’s sales to slump sooner rather than later. Kroger’s identical supermarket sales growth, similar to the same store-sales number other retailers use, has been growing for the last 50 quarters. Kroger has been able to hold on to this record despite being a company that prefers inorganic expansion over organic growth.
Much of Kroger’s expansion has come through acquisitions as the company keeps cherry picking regional players to add to its growing list. The fact that its store sales have been growing for more than 12 years on the trot is a huge validation of its ability to find the right companies to buy.
Kroger has mastered the art of buying different brands and letting them live on instead of folding them all into one single brand. The only possible problem with its model is that it's concentrated in certain states across the country, as you can see from the map above.
On the plus side, that gives plenty of room for Kroger to improve its store count –Â and its top line along with it.
But why does Kroger’s valuation keep coming down when the company keeps posting growth numbers on the sales front as well the same-store sales front? The answer lies in the current market condition. Kroger makes a lot of money from perishables; 23.4% of its sales came from this segment last year. It’s an extremely crucial segment for the company, and it has been growing steadily over the years, as you can see in the second row of the table above.
And that is also the cause of its current problems. The U.S. is going through one of its longest stretches of food price deflation, and margins are getting smaller for retailers across the board. Kroger is still showing positive growth, but over the past three quarters that growth has slowed significantly. Removing fuel, sales growth for the first quarter stood at 2.4% while the second quarter came in at only 1.7%.
The market does expect the slowdown to continue, but unfortunately for Kroger, its investors punished the stock before the fact. From a forward perspective, this would be an ideal stock to pick up while the going is bad. The company knows inorganic growth like the back of its hand, the opportunity runway is long, and Kroger will continue to grow after the medium-term downturn is resolved.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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