Kroger (KR, Financial) should benefit from its continuous efforts of improving store networks, fresh product offerings, better digital capabilities and promotional private label brands. These plans are generating higher traffic for Kroger, and it should accelerate its revenue and earnings numbers in 2015.
Making the right moves
The supermarket chain is expanding its store network that carries greater growth opportunity such as new store openings, possible mergers and acquisition in the future. KR recently acquired Harris Teeter and Vitacost. These acquisitions have widened the growth horizon with new markets for Kroger. It has successfully integrated Harris Teeter into its business as it completes its first year since the merger. This mixing has drastically improved its market presence. Further, the company continues to pursue its fill-in strategy that should drive growth for Kroger in 2015, and beyond.Â
Kroger is finding new ways to utilize Vitacost. It plans to use Vitacost as its strategic advantage into Natural Food business. Vitacost has better expertise in this business and this should help Kroger to strengthen its natural and organic food sales, going forward. It is into the sixth month of this merger.
Expanding its presence
In addition, Kroger is expanding its market presence into high-income consumer markets in Baltimore and Washington DC. This should further strengthen its store network. According to a report by JP Morgan Chase, Kroger is expected to beat Whole Food Market (WFM) within two years. It is benefiting remarkably from its excellent customer service, loyalty program and extensive selections. Moreover, Kroger is offering private label products with relatively low prices, which continue to fetch new clients for the retailer. Also, its strategy of offering specialty, natural, and organic food should assist the retailer to overtake other chains like WFM.
For example, its Simple Truth Brand has experienced tremendous growth in fiscal 2014. This brand generated over $1 billion in sales for the first time since its introduction. Going forward, Kroger plans to use this brand to offer discounted natural and organic products with low prices. It is effectively integrating this brand across its stores in the United States. Kroger expects this brand to remain a strategic growth driver in the future.
Following these strong operational as well as financial results, the company has provided better guidance for fiscal 2015. It expects its sales to grow in the range of 3% to 4% in 2015. Also, its earnings are forecasted to improve approximately $3.80 per share to $3.90 in the fiscal year 2015. Kroger projects a capital investment of $3.0 to $3.30 billion in 2015. This should assist the company to support its growth opportunity and the long-term growth strategy.
Conclusion
Kroger looks pretty healthy with its operation and financial growth. It is continuously diversifying its business that should generate better returns, and drive value for its shareholders in the future. The analysts expect its earnings to grow at CAGR of 10.68% for the next five years. This is indeed a good long-term return on the stock.
Moreover, the stock is pretty cheap as it trades at forward P/E of 17.74, below its trailing P/E of 22.12. This indicates sufficient space for growth in the future with better returns. It has PEG ratio of 1.84 that continues to support its growth in the long-run. Its balance sheet carries total a cash of $268 million and has total debt of $11.66 billion. It has operating cash flow of $4.18 billion and levered free cash flow of $1.18 billion.
