Kroger (KR, Financial) operates 2,778 retail food stores under a range of local banner names and approximately 1,387 have fuel centers.
I like this segment of retail because prices will continue to rise, thus sales, profits and market value will rise as long as Kroger stays within the framework that has made it great thus far. More importantly, with the stock off 27% in 2016 and trading under 15 times earnings, it is time to buy.
Despite a six year stretch of stagnation, Kroger’s stock finally caught up to its financial growth, trading ~3x higher than in 2006. Here’s a remarkable stat that should not go unnoticed:Â Kroger has posted 50 consecutive quarters of positive same store sales growth.
Grocers haven’t been crushed by online shoppers like other segments of retail, and while the first quarter gain in same store sales of 2.4% was the slowest in five years, Kroger remains in pole position within the industry.
The stock is now priced at levels that make it worth owning again.
The company attributes slower growth “sluggishness” to lower commodity prices across departments like meat and seafood and not competitive pressures. In fact, there seems to be a lot of chatter that it could make a run to acquire Whole Foods Market (WFM, Financial), adding another big member into its already impressive family of companies.
Kroger is more of a baby Berkshire than any other company, documenting impressive gains across every area of their financial statements - mainly fueled through acquisitions.
Kroger recently invested in Lucky's Market, 17 natural foods stores in 13 states, and it is pursuing a fast-growth track for the six-year-old Mariano's chain, a concept emphasizing fresh, high-quality foods with 30 stores around the Chicago metro area.
Kroger is experimenting with different ways to reach customers, rolling out  “click and collect” online shopping services, which are now available in 25 markets. All these tests have pushed capital expenditure up above 100%, which may be a reason not to invest in Kroger, but the economic durability of the brand and the great customer experience still outweigh the downside negatives.
Business metrics
- Return on Equity: 32%
- Gross Margins: 22%
- Inventory Turnover: 14x per year
These numbers reflect Kroger’s efficiency and ability to extract value as growth slows. In the last decade, the company’s sales are up 66%, its net income is up 85%, earnings per share up 175%, and it is paying out 300% more in dividends. Investors that bought in 2006 are now earning a 4.2% yield with a strong possibility of continued growth.
Kroger’s EPS currently sits at $2.11, but through continued acquisitions, cost efficiencies and share buybacks, I am pegging that number to reach $5 to $6 a share at some point in the next decade. The stock could more than double in that time if the market allows for multiple expansion back to ~20x. So, it is not out of the realm of possibility for Kroger to produce 200% gains going forward - all while paying a decent dividend.
Disclosure: I do not own KR, but may buy the stock in the next 72 hours.
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