Kroger's Basket Bursts With Growth

1/19/2015


  Recent Price
$66
  Dividend
$0.74
  Yield
1.1%
  P/E Ratio
20
  Shares (millions)
492
  Long-Term Debt as % of Capital
65
  52-Week Price Range
$66.69 - $35.13

Kroger ($66; KR) has delivered 44 straight quarters of higher same-store sales excluding fuel. While price inflation on food tends to offer a natural tailwind, Kroger's track record is particularly impressive considering troubles at Wal-Mart Stores ($87; WMT), which has grown U.S. same-store sales just twice in the past eight quarters.

Competition in the grocery business can be fierce, and Kroger has shown a willingness to cut prices to protect its market share. It has increased penetration in established markets, with more households shopping at its stores. Kroger, scoring above 80 for both Momentum and Earnings Estimates, is a Focus List Buy and a Long-Term Buy.

Business breakdown

Founded in 1883, Kroger runs more than 2,600 supermarkets and nearly 800 convenience stores. It operates its own bakeries, delis, and dairies that supply about 40% of private-label products. The company divides private-label goods into three tiers to accommodate shoppers seeking different price points.

Kroger also offers a couple of organic brands, which boast above-average profit margins and are gaining popularity among health-conscious shoppers. Kroger claims to be the second-largest retailer of natural and organic food, with sales projected to reach about $1 billion in fiscal 2015 ending this month.

Kroger's revenue climbed 11% to $83.26 billion in the nine months ended October. Management attributes much of that growth to rising gasoline sales and its $2.44 billion acquisition of Harris Teeter, completed in January 2014. Same-store sales excluding fuel rose 5.0% in the nine-month period, driven by higher store traffic and rising prices. The Harris Teeter deal has contributed to wider gross profit margins, as have unusually high margins on fuel.

Up until now, Kroger's businsess has been insulated by a general aversion among shoppers to purchase groceries online. However, Amazon.com ($293; AMZN) is testing online grocery delivery, and Kroger is taking steps to protect itself — such as a pilot program for delivering fresh groceries in Denver — in case consumer preferences change. Kroger bought an online coupon company in February. In August, it paid about $280 million for Vitacost, a web retailer that sells vitamins and health products.

Conclusion

For the January quarter, Kroger's guidance implies per-share profits of $0.84 to $0.88, translating to growth of 8% to 13%. The consensus stands at $0.88, though it's worth noting Kroger has topped the consensus profit estimate in 12 of the last 13 quarters.

Kroger expects long-term profit growth of 8% to 11% a year, though fiscal 2016 growth may hug the low end of that range if fuel margins return to historical norms. Kroger expects same-store sales to rise 4.0% to 5.0% for the year, and low fuel prices might spur shoppers to trade up to premium and organic brands.

At 20 times trailing earnings, the stock trades well above its 10-year average of 14 but well below the average of 26 for S&P 1500 food retailers.

An annual report for The Kroger Co. is available at 1014 Vine St., Cincinnati, OH 45202, (513) 762-4000, www.kroger.com.

KROGER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Oct '14
0.69
vs.
0.53
11%
56.11
-
48.58
18 - 16
Jul '14
0.70
vs.
0.60
12%
51.49
-
45.31
17 - 15
Apr '14
1.09
vs.
0.92
10%
46.04
-
35.13
16 - 12
Jan '14
0.78
vs.
0.71
-4%
43.10
-
35.71
16 - 13
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
98.38
2.85
0.62
43.85
-
27.53
15 - 10
2013
96.75
2.52
0.50
28.00
-
20.98
11 - 8
2012
90.37
2.00
0.43
25.85
-
21.14
13 - 11
2011
82.19
1.74
0.39
24.14
-
19.08
14 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
82
52
86
40
85
94

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com