The Master of Food Retailing

I admit it; I’m a food junkie—devouring cooking shows, swapping recipes, enrolling in gourmet cooking classes—I even write the food column for my local newspaper. So, it should come as no surprise that I actually love to go grocery shopping—at home and when I travel.

And over the years, I’ve always loved visiting companies in the food business. In 1996, I flew to Maine to interview Hannaford Bros., a regional grocer that was trying new marketing techniques such as ready-made meals, recipe cards and in-store banking—all unique ideas at the time. My subscribers gained 35% on that stock recommendation. The company expanded rapidly and was acquired by Delhaize around 2000.

In 2009, I recommended Overhill Farms—maker of Michelina, Boston Market and other frozen foods—before the company was acquired by Bellisio. We took home profits of 89%. And Tesco, a British grocery retailer, gave us returns of 41%.

But the company I recently featured in Wall Street’s Best Investments is even nearer and dearer to my heart. One of my first jobs as a teen was as a cashier at Kroger (KR) in my hometown of Dayton, Ohio.

Headquartered in Cincinnati, Kroger operates supermarkets and multi-department stores under the banner names of Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Frys, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smiths. As of mid-third quarter, the company operated 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names, plus 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants.

Kroger can claim many “firsts” in the food business:

  • The first grocer in the country to establish its own bakeries
  • The first to sell meats and groceries under one roof
  • The first to manufacture the products it sells

Today, the company operates 40 food processing facilities that make thousands of products ranging from bread, cookies and milk to soda pop, ice cream and peanut butter. Nearly half of its 14,400 private-label items are made in-house and account for 26% of grocery dollar sales at Kroger.

Kroger, the stock, was recently recommended in Wall Street’s Best Investments by two of our contributors—Jim Kelleher, of Argus Weekly Staff Report and Richard Moroney of Dow Theory Forecasts.

Jim Kelleher had this to say:

“We believe that Kroger (KR) is differentiating itself by delivering consistent sales and earnings growth in a very volatile retail sector. Kroger has been a leader in using rigorous data analysis to offer personalized promotions, in recognizing the need to offer low and compelling prices, and in efficiently managing operations to enable the price investments that drive market share.
On September 11, Kroger reported a 26% increase in fiscal 2Q earnings, to $0.44 per share. EPS topped the consensus of $0.39 and our estimate of $0.39. Excluding fuel, total sales rose 5.7%.
Identical-supermarket sales, which exclude fuel, rose an impressive 5.3%, which was above the Street Account consensus forecast of 4.5% growth. Kroger posted growth in every department and division. This was the 47th consecutive quarter of higher identical-store sales.
Management has raised its FY16 EPS guidance to a split-adjusted $1.92-$1.98 from a prior $1.90-$1.95, and its guidance for identical supermarket sales growth by 50 basis points to 4%-5%.
We believe that management’s focus on delivering value to shoppers will continue to boost market share in an economic environment that is improving, but still challenging for some customers. The company has increased identical-store sales for 46 consecutive quarters and management has been working to strengthen customer relationships through value pricing. It is also using data analysis to offer targeted coupons and rewards to its best customers.
We believe that the recent purchase of Harris Teeter adds an excellent store operator in the Southeast, a complementary geographic region for Kroger. On a trailing basis, Harris Teeter had a higher pre-merger operating margin than Kroger. We also believe that the proposed acquisition of Vitacost.com will expedite Kroger’s e-commerce presence and accelerate its growth in natural and healthy foods.
We see upside in KR shares and are increasingly optimistic about management’s plan to accelerate earnings growth. We have raised our five-year growth forecast three times since 2012. The most recent increase came amid increasing evidence of management’s ability to raise operating margins and profit from incremental capital investments.
Kroger has a record of returning cash to shareholders. Through 4Q15, the company had raised its dividend at a compound annual rate of 16% over the previous three years and repurchased about $1.3 billion of its stock last year. On June 25, the company increased the dividend by 13.5%, authorized a new $500 million buyback plan, and announced a 2-for-1 stock split that took effect on July 13, 2015.
We are raising our one-year price objective to $43 from $42.”

And Richard Moroney added:

“Kroger’s (KR) revenue increased 1% to $25.54 billion, while operating cash flow advanced 3% to $1.00 billion. Same-store sales excluding fuel increased 5.3% and management raised its full-year target for the second time this year.
The grocer grew its market share nearly 1% last year and continues to see healthy store traffic and rising volumes.
Kroger is expanding its online-ordering program, a strategy made easier by last year’s $287 million acquisition of Vitacost.com. Kroger has increased same-store sales in 47 straight quarters—and recent growth is the strongest in four or five years excluding inflation. Kroger is a Buy and a Long-Term Buy.”

Kroger’s stock is trading at a P/E of around 19, about two-thirds the P/E of its competition. The company is growing at double-digit rates—both internally and by acquisition—and has an enviable return on assets and equity. Shares look undervalued at this level, and when you add in the company’s policy of steadily increasing dividends, you may just conclude it’s time to “check out” the stock in this grocer’s express lane.

kroger

This is the kind of expert stock analysis that will help you build a strong investment portfolio. If you’re not already a subscriber, I hope you’ll check out Wall Street’s Best Investments where you’ll find my top picks from Jim Kelleher, Richard Moroney and more than 200 other expert advisors.

Happy investing!

Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks

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