Kroger (KR, Financial) is the third-largest corporate employer in the U.S. behind Walmart (WMT, Financial) and McDonald's (MCD, Financial). Yet, with a market value of $26.6 billion, Kroger looks really well positioned for continued growth.
Since 2008, its revenue has increased to $115 billion from $70 billion, generating a total net profit of $12.9 billion, and using the cash flow to grow through intelligent acquisitions. All this happened while Kroger kept buying back shares and consistently grew both EPS and book value.
Investors should be aware of the coming market correction, which will cause most stocks to fall, but while the market crashed more than 50% in 2008, Kroger lost less than 20% from peak to trough. Going back to 9/11 and the dotcom bust, Kroger had a similar trading pattern. More importantly, in the last 10 and 20 years, Kroger has handily outpaced the Standard & Poor's 500.
From a long-term investor’s perspective, this is one of the best companies you can own; off 15% on the year, now is the time to buy it. Kroger holds the first or second position in over 80% of its markets, giving it a superior cost advantage and significant brand recognition. It also benefits from strong data analytics that enable the company to better tailor its merchandising mix and promotions to more effectively align with customer preferences. The combination allows it to compete with other mass merchants like Walmart and Target (TGT, Financial) as well as alternative outlets including e-commerce and hard discounters such as Aldi.
Kroger’s sales per square foot is around $650, among the highest across its retail space. And the company is making a bigger push online with the ClickList service, allowing customers to shop online and then pick up at the local store or have them delivered. This initiative is contributing to the short-term bottom-line sluggishness, but management indicates that over time there is little difference in the profitability of online and traditional customers. Kroger is also experimenting with forward-thinking models including using Uber to deliver groceries to shoppers.
This is the future: customers' choice. No longer will just one option work. Some will still want to shop, others will want delivery. The one thing that will need to get better is the online experience, but analysts are predicting a 20%-plus annual compounded growth from 2018 to 2022. That will coincide with the next market correction and even put Kroger in a better position to grow faster over that time.
From a purely financial perspective, if the company continues its market dominance and management uses cash to buy back stock, in five years, the EPS could be into the $3 range. Thus with a little help from multiple expansion, the stock could easily be priced $50 or higher. That’s short term; longer term the company will continue to dominate, people will continue to want and need low-cost food products and while the market shifts, Kroger will be there on or ahead of the trend.
Disclosure: I do not own any stocks mentioned in this article but may purchase shares in the next 72 hours.
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