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To better understand the value that Kroger shares currently present, let’s take a closer look at the latest results. Hiding behind the top layer are the comparable store numbers. Excluding fuel, comparable store sales were up 3% or $425 million vs. the year ago quarter. Increases in these numbers are great news in the face of deflationary pressures and cost cutting that the industry has undertaken over the past year. The only way Kroger could achieve such results in non-fuel categories is by taking market share away from its competitors.
An important question to ask is how well did Kroger’s low price strategy work in Q2 to compete with Wal-Mart (WMT). Wal-Mart is the only retail giant that is larger than Kroger and over the past two years it has made great inroads into Kroger’s core competency – food retailing. Reviewing Wal-Mart’s recent 10Q for Q2, notice that total comparable US store sales declined 1.5%, marginally worse than Kroger’s 1.3%. More importantly, however, the report’s footnotes tell us that fuel sales made up only 0.9% of this decrease. This means that excluding fuel sales, Wal-Mart’s comparable US numbers still declined 0.6%. Wal-Mart does not report what percentage of US revenue they derive from gasoline sales, but $3.7 billion or about 5% of their Q2 total US sales is a good assumption. Thus, it looks like Wal-Mart’s US non-fuel sales were down around $439 million vs. Q2 2008.
Kroger gaining in non fuel sales almost exactly what Wal-Mart has lost, certainly looks like the taking back of market share form the giant. And the Kroger story only starts there. Did you know that the new Kroger low price strategy is not so low in price? Instead, Kroger mostly expanded on the use of price leaders – something that they do better than any of their competition. Another area where Kroger beats out competition flat down, is in the use of store brands - they sell lots of them and at higher average margins. Oh, and let’s not forget vertical integration. Did you know that Kroger actually owns several dairy farms? That’s how they were able to quickly bring the price of a gallon of milk back down to $1.58, as prices of cattle feed plummeted along with ag commodities. Milk, btw, is traditionally one of the best price leader products for grocery stores.
Now, let’s see how well Kroger actually did in the fuel department. We can arrive at the change in fuel volume sold by looking at the average retail gas prices for Q2 of 2008 and 2009. By averaging the 13 weekly U.S. Department of Energy all grades all formulations retail prices for each of the quarters, we get a Q2, 2009 average price of $3.83/gallon vs. Q2, 2008 average price of $2.39/ gallon. Kroger’s fuel sales in the year ago quarter were $2.23 billion, while this year’s Q2 brought them only $1.59 billion in fuel sales. At average prices that’s an almost 15% growth in gallons sold – not bad at all.
Technically, Kroger shares have been in a downtrend since the summer of 2008. An overriding shorter term mild uptrend emerged in February of this year. The two trends are now in a tug of war for dominance. Tuesday’s KR price action took shares 5% below their 60 day moving average on high volume. Technicians generally see this as a bearish sign. I tend to think of it as the market overreaction presenting at least a short term buying opportunity for Kroger.
Disclosure: I used the opportunity to buy a full position in Kroger on Tuesday morning at $20.47
Jake Berzon
[www.stockvalues.org]
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