Kroger Co. (KR, Financial) offers good value for the money, in my view, after its 5% stock price decline in the past 12 months.
The grocery retailer’s plans to reduce its costs, invest in its website and sell a growing number of private brands could catalyze its financial performance in the upcoming years.
Profit growth
The company is making changes to its business model that could improve its efficiency. For example, it has reduced the number of management roles across its business in fiscal 2019. This led to the retailer posting severance charges of $80 million in the fiscal 2019 third quarter, but its strategy will contribute towards its goal of cutting $1 billion in costs by the end of fiscal 2019. This follows the $1 billion cost savings it made in 2018, and could further improve the financial prospects for the company.
In addition, Kroger is increasing the number of private label items that it sells. It introduced 231 new products of its own brands in the third quarter, which have resonated with customers according to the company’s third quarter results. Kroger's brands recorded a 3.4% rise in sales compared to the fiscal 2018 third quarter. The company’s brands may offer higher margins for the business and thus increase its profitability.
Online sales
The retailer expanded the geographic coverage of its website in the third quarter so that 96% of its existing customers who currently shop in-store can now order products online for collection or delivery. This could strengthen its competitive position in the fast-growing online retail sector.
Kroger is rolling out its new distribution facilities as part of its partnership with UK online grocery company Ocado. The new facilities include a greater amount of automation compared to Kroger’s existing distribution centers. This will lower its overall costs and provide a more seamless ordering and delivery process for its customers, which should improve its stock availability. This could lead to fewer customers having substituted items due to its products being out-of-stock, which may improve the shopping experiences of the retailer’s customers.
The business plans to use the data it has on its customers to make personalized product recommendations via email and on its website. This could boost the company’s sales and improve its competitive position versus sector peers.
Potential difficulties
Kroger’s financial performance could be negatively impacted by rising labor costs due to increasing minimum wage rates in many districts across the U.S. It is also currently in negotiations with several labor unions regarding the pay and working conditions of its employees. The outcome of those negotiations could impact its financial performance, as well as set a precedent for future pay increases across its entire workforce.
The company has so far been able to strike a balance between offering attractive wages for its employees and remaining competitive on its costs. It now has an average hourly pay rate of around $10.23 and offers training and development opportunities for staff, which has contributed to its improving employee retention rate in fiscal 2019. This could lead to the company having stronger levels of customer service than its peers as a result of its more stable workforce.
Future prospects
Market analysts forecast that the company will deliver a 12% rise in its earnings per share in fiscal 2020, followed by further growth of 7% in fiscal 2021. The retailer’s price-earnings ratio of 14 suggests that it could be undervalued given its potential to increase sales and reduce costs as it implements its growth strategy.
Disclosure: the author has no position in any stocks mentioned.
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