Why no one is eating Kroger's lunch
The grocery store chain shows that even when a giant like Wal-Mart invades its turf, it can still succeed.
The country's largest supermarket chain recently reported better-than-expected quarterly results and gave bullish guidance. That's despite a grocery expansion at Wal-Mart (WMT) that was expected to punish Kroger. Instead, giant discount retailer has come under fire for failing to keep its shelves stocked with fresh produce.
Amazon’s (AMZN) planned grocery delivery service is another potential threat, but it will be expensive to implement and faces stiff competition from local grocers, such as Kroger.
The Cincinnati-based company is in a good position to compete against these larger rivals. For one thing, it has reported 38 straight quarters of rising same-store sales, a key retail metric of sales at stores open at least a year. Excluding fuel, those sales rose 3.3% in the latest quarter.
Kroger, which owns 2,419 supermarkets and multi-department stores in 31 states under two dozen names, is also well managed. It recently halted double coupons in some markets and lowered the everyday prices on thousands of items. Although coupon clippers weren't happy, investors were pleased because the moves didn't affect gross margins.
As consumers show greater interest in organic food, Kroger has seen a spike in sales for its Simple Truth line. It's planning to add 75 new items by year-end. President Rodney McMullen told analysts during the recent earnings call, "Simple Truth has been obviously a huge home run."
Moreover, Kroger shares are also cheap, trading at a recent price-to-earnings multiple of 11.89, near a five-year low, according to Reuters. That's a discount to Wal-Mart's 14.52 multiple and Whole Food's (WFM) P/E of 36.8. Analysts have an average 52-week price target of $34.11 on Kroger's stock, which about where it trades now.
Wall Street, though, may be underestimating Kroger's growth potential. The company, whose brands include Kroger, Ralphs and Dillons, will likely add delivery to compete against its larger rivals. It's also very focused on shareholders, having returned more than $1.3 billion to them over the past four quarters.
Kroger's stock may not be on the discount rack for long, so investors should consider buying it today.
Jon Berr doesn't own any stocks mentioned here. Follow him on Twitter @jdberr.
I shop Krogers 95% of the time. Walmart pet food prices are the best, but Kroger's is a well-run, clean, well-stocked store. LOVE those gas points also!
Product quality control is not as good at Walmart than most "traditional" supermarkets
Temperature control (Food Safety) is not as good at Walmart than most "traditional" supermarkets
You get what you pay for
Hoorah for Kroger's! At the Walmart I sometimes shop at (because of the wife) the produce manager picks his nose and tells you how he was a sniper in Vietnam. Let's just call him Booger Flikker and no I DO NOT buy produce at Walmart. I hate to even park my car at Walmart as it appears to be a Waste Disposal Site.
Wal Mart is the most horrible store with no quality, no service and no business ethics. I will continue to support stores that respect unions and treat their employees (and customers) with respect!
Wal-Mart has been so focused on satisfying Wall Street’s need for growth and margins that they forgot to satisfy their customers.
Wal-Mart doesn’t understand the grocery business. The grocery department doesn’t carry the right products (I still have to go to Kroger to get the rest of what I need), or produce (quality), in the right sizes, at the right price points in the right location (if you need lights bulbs, or tooth paste or contact wetting solution at my Wal-Mart you’ll have to walk two football fields over to the hardware/lighting department or pharmacy). Kroger = better selection of products, better prices usually, better organized (layout) and focused on who and what they are- a Grocery store.
Wal-Mart has no idea how the grocery business fits in with all the other things they want to be — Target, Best Buy, Home Depot, Sports Authority, Bed Bath and Beyond, Walgreens etc. Everything Wal-Mart does now they do poorly compared to their newly framed competition.
Wal-Mart use to have the right departments, with the right products at the right price. They had what I needed, not any more. Now when I go to Wal-Mart, I know I’ll also have to go somewhere else to finish getting everything Wal-Mart use to carry, so I keep skipping Wal-Mart— more and more and more.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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