Kroger's (KR, Financial) stock price has seen a significantly run up over the last year. The company's stock has gained 75% in the last twelve month versus S&P 500's 12% gains. Analyst opinion is overwhelmingly bullish on the stock, with 14 of the 20 analysts covering the stock rating it as buy or strong buy. Here's a look at the company in detail.
The Kroger Co. was founded in 1883 and incorporated in 1902. The company is one of the largest retailers in the world based on annual sales. Kroger also manufactures and processes some of the food for sale in its supermarkets. As of February 1, 2014, the company employed approximately 375,000 full and part-time employees, and operated 2,640 supermarkets and multi-department stores--1,240 of which had fuel centers.
Kroger is firing on all cylinders. Back in October 2012, the company first outlined its growth plans that included four key performance indicators: positive identical store supermarket sales growth, slightly expanding non-fuel FIFO operating margin, growing return on invested capital and annual market share growth. In 2014, the company met or exceeded each of these metrics. At the end of the year, the company achieved 45th consecutive quarter of positive identical supermarket sales growth (ex. fuel). The company also expanded its FIFO operating margins (ex-fuel) and improved return on invested capital even as it increased its capital expenditure.
This strong performance also contributed to shareholder returns. The company exceeded its long-term guidance of net earnings per diluted share growth rate of 8% to 11% in fiscal 2014, and increased its dividend for the eighth consecutive year.
This improved performance is giving rise to a virtuous cycle for Kroger. Better performance implies more profitability which means the company has more resources to invest in its growth and provide better consumer experience. The company is currently investing $3.5 billion annually in lowering prices. One particular category where the company is seeing a very positive response from the customers is its natural and organic food category. The company's natural and organic foods collection – Simple Truth – is seeing double digit sales growth. Last year, Simple Truth reached $1.2 annual billion sales mark. The company is using its merchandising expertise, manufacturing base and buying power to make its products more accessible.
These efforts are helping company grow its market share and same store sales. The company's same store sales (ex-fuel) increased 6% in the fourth quarter. According to Nielsen's Point of Sales data, Kroger's overall market share grew 60 basis points during fiscal 2014. Nielsen's data also indicated that the company increased its market share in 18 markets of the 20 markets outlined by Nielsen report.
In addition to strong growth and market share gains, the company is also doing a good job in returning cash to the shareholders. Kroger's strong financial position allowed the company to return more than $1.6 billion to shareholders through buy backs and dividends. During the last year, Kroger repurchased 28.4 million common shares of the company. I expect these repurchases to continue going forward.
In 2015, the company is anticipating identical supermarket sales growth, excluding fuel, of approximately 3% to 4% for fiscal 2015. Full-year net earnings for fiscal 2015 are expected to range from $3.80 to $3.90 per diluted share. This is inline with Kroger's long-term net earnings per diluted share growth rate of 8% to 11%.
Kroger is trading at 19.83 times current year earnings and has a forward annual dividend yield of 1.00%. Out for 20 analysts covering the company, 14 have buy ratings and six have hold ratings. Given the company's strong earnings growth potential, market share gains, history of returning cash to shareholders and reasonable valuations, I believe the stock is a good buy at current levels.
