Kroger Co. (KR, Financial) is one of the largest U.S. grocery retailers. This traditional firm was founded in 1883 and since then, it has expanded across 34 states and onto the District of Columbia through a network of 2,640 supermarkets and multi-department stores. Apart from its namesake, the company operates under roughly 24 other banners including Ralphs, Fred Meyer, King Soopers, Fry’s and Food 4 Less. In addition, the firm conducts 786 convenience stores, 320 fine jewelry locations, 1,240 supermarket fuel centers and 38 food-processing plants directly or through subsidiaries or franchises and operating agreements.
Competitive Positioning
The grocery market comprises both traditional grocers like Kroger and multinationals such as Wal-Mart Stores Inc. (WMT, Financial) and Costco Wholesale Corporation (COST, Financial). These giants use food as a loss leader in order to drive traffic for the purchase of higher-margin items. This has created a scenario of aggressive price competition which most traditional grocers can’t support since, unlike large rivals, these companies derive profit from food sales. However, a large store network and $100 billion in sales have enabled Kroger to maintain a better competitive position than its traditional peers, since the scale achieved by the firm has allowed it to negotiate volume discounts with suppliers and to handle better fixed costs.
Furthermore, Kroger has attained a 25% penetration of its private-label products (compared to the national average of 20%) and it also offers gasoline in nearly 50% of its locations. Thus, the firm avoids the threat posed by competitors offering gasoline to drive traffic, while it boosts margins through the sale of its own products, 40% of which the company also manufactures. Moreover, its customer-centric business model represents a compelling value proposition that favors customers’ loyalty through initiatives like the offering of personalized promotions to clients holding its loyalty card.
A Solid Performance
As a result of the aforementioned strategies, Kroger has been able to support growth in both its top and bottom lines. This, in turn, has enabled the firm to deploy capital into the expansion of its store base and the launching of new products, thereby boosting its market share. Consequently, the company has achieved strong identical store sales growth for around 41 consecutive quarters and better-than-expected bottom-line performance in the fourth quarter of fiscal 2013.
A Compelling Outlook
Given Kroger’s growth trajectory, the company is well positioned to attain its long-term earnings per share growth target of 8% to 11%. For 2014, the firm expects earnings per share to range between $3.14 and $3.25, reflecting a growth rate of 10% to 14%. Identical supermarket sales, in turn, are expected to increase by 2.5% to 3.5% in the same period. Further, the company is actively increasing shareholders’ value through dividend payments and share repurchases. In fiscal 2013, the firm deployed more than $928 million of its cash flow in returns to its stockholders and it expects returns to increase between 10% to 13.5% in the long term.
Kroger’s stocks trade at 14.60 its trailing earnings compared to the industry median of 19.10 and its return on equity showcases an impressive 35.58% against its rivals’ average of 9.80%. Further, its earnings per share reported a 193.10% growth against its competitors’ lean 5.10% average. Investment guru Ray Dalio (Trades, Portfolio) recently incorporated Kroger to its portfolio, following my bullish feeling about the company’s growth potential.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
