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Riddhi Kharkia
Riddhi Kharkia
Articles (151) 

A Solid Quarter and Bright Future Prospects Make Kroger A Safe Buy

September 29, 2014 | About:

Kroger (NYSE:KR) has definitely been creating some steam on the exchange this year as the stock is up 33% till date. This is especially commendable because the entire brick and mortar retail sector has been facing strong headwinds in form of unstable economic conditions and advent of online retail giants like Amazon (NASDAQ:AMZN)and eBay (NASDAQ:EBAY). In its recently-reported quarter, Kroger has generated revenue of $25.31 billion, an 11.6% increase versus last year and beat the analyst estimates of $24.9 billion. The company reported its earnings at $347 million, 9.5% growth in its bottom line compared to last year.

Kroger has reported its 43rd consecutive quarter of positive comparable store sales growth. The growth in comp sales can be explained by better service provided by the company which created a great shopping experience by offering complete assortment and low prices. In fact, the phenomenal and industry standard service has not been limited to its stores but also extends to its digital strategy. Kroger's online efforts are spearheaded by the philosophy that customers do not like to spend much time doing grocery shopping and hence, the company envisions a day not too far off when customers skip some store visits to instead have some items delivered to their home or ready for drive-through pickup.

Switching to digital

Kroger’s online efforts has also benefitted customers through saving money via their digital coupons that have seen considerable growth in past quarters. As per news, Kroger has already begun testing online grocery ordering and pickup near its headquarters in Cincinnati, Ohio. As a result of many supermarkets, the company surely has the ability to make efficient delivery of grocery orders that will save its customers a great deal of time. Kroger completed its acquisition of Harris Teeter Supermarkets Inc. (HTSI) in January 2014, and Harris Teeter already offers online ordering. Kroger is basing this new test on the same click-and-collect system that Harris Teeter features. Once operating for all of its customers, Kroger's online ordering will allow shoppers to place an order then pick it up at a drive-up window, without ever needing to leave their car. This is the same model Harris Teeter uses. Harris Teeter also offers home delivery in limited markets but it's not clear if Kroger intends to expand to offer that service at this time.

Talking of acquisitions and the company’s attempt to going digital, it is significant to mention another acquisition announced by Kroger. The company in discussion is Vitacost.com (VITC), an online retailer of healthy living products. Vitacost operates across all 50 states in the U.S., including those 16 states where Kroger still does not have its reach. Kroger's management also expects the deal to enhance the sale of its own Simple Truth organic product line. Kroger should be able to increase its digital capabilities, thereby improving the company's omni-channel in the core grocery business from the acquisition. Vitacost's acquisition by Kroger will be advantageous as it should help in tapping a fast-growing health product market, as people are turning more health-conscious.

Organic is where the growth is

As the world is becoming health conscious, emerging trends show that customers are favoring organic foods over the other choices. Kroger seems to be leveraging this trend positively, as the organic products sold under Kroger’s store brand have already surpassed the billion-dollar mark in sales. This magical figure highlights the fact that unlike older times, organic food products are now slowly becoming the preferred choice in many households. And, with many of organic foods being introduced, the prices of natural products are slowly going down.

Increase in sale of the organic category is beneficial for Kroger in a number of ways. Firstly, as the people are turning more health conscious, the comparable-store sales growth is more compared to that for rest of the store. Another important positive sign about Kroger is that it is planning to hire 20,000 new employees across the nation, as its growth trajectory has created more employment opportunities. This will definitely add a reasonable amount of optimism towards overall brand perception.

Takeaway

Kroger has been on a growth trajectory and again, the nation’s largest operator of traditional supermarkets has proved this by delivering strong results in the second quarter. As a result of the solid results, Kroger upped its earnings guidance from previous $3.19-$3.27 to $3.22-$3.28 for the year and also maintained its 8-11% long-term growth guidance for earnings and growing dividend payments. Analysts have estimated the company to earn $3.28 per share in the fiscal 2014.

One of the reasons that has catapulted Kroger to deliver such exceptional performance is its excellent customer service, the length and breadth of its product offerings and continuing offers that save money for the customers. This suggests that Kroger has built itself to be a fundamentally strong company and its initiatives reflect a continuation of the same. The forward P/E is valued at 14 times, signifying strong growth prospects in the future making the company a safe bet in the long run.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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