It’s true that Kroger (KR) is the nation’s largest grocery store chain. But did you know it’s also the nation’s third-largest merchandise retailer, behind Target (TGT) and Wal-Mart (WMT)?
I have been bullish on KR for quite a while, and it has been a denizen of my Blue Chip Growth Portfolio. The stock is up 100% since early 2014, and it’s up 95% since I added it to the BCG Portfolio.
The point is, this isn’t a fad.
While WMT tries to reorganize its entire operation so it can manage to stay competitive moving forward — increasing wages for its workforce and building a credible online retailing presence — KR is steaming ahead, incorporating new technologies, offering newer stores and building its house brands into must-have options.
For example, its Simple Truth organic food brand is now the largest organic food brand in the world.
Kroger Trying New Things
Its newest effort is to put price guns in its shoppers hands. It’s called Scan-Bag-Go, and essentially, customers pick up a scan gun, and when they buy an item, scan it and put it in their cart. They then go to special register where they place the scanner and it’s read by the register. They pay and go.
In the Cincinnati stores where it’s being tested, the feedback has been very positive. And KR is seeing that customers are coming back to use the tech. And it has had an impact on shoppers’ ability to shop and go as well — wait times for checkout have dropped from an average of four minutes in 2010, to 26 seconds today.
It’s these kinds of ideas that continue to attract repeat business. And this isn’t just anecdotal. For the past year, KR’s same-store sales have trounced both TGT’s and WMT’s.
Its ‘customer first’ approach is working. The stock has outperformed the S&P 500 for the past five years.
Another thing KR has going for it is its strength in private-label foods. They account for 23% of its total sales, which is significantly larger than any of its rivals. And the fact is, private labels have much bigger margins than name-brand products, so KR continues to expand its margins in a very-low-margin business.
Avenues of Growth
The other component to maximizing earnings for a grocery-driven business is volume. If you’re in a low-margin business and continue to expand margins with private label goods, the only next step is getting bigger.
And this may be in the works; rumor has it that specialty grocery retailer The Fresh Market (TFM) is grooming itself for sale. This would be a perfect addition to a retailer like KR, which already owns Harris Teeter.
TGT and WMT are also looking for a specialty chain like TFM, each for their own reasons. But given KR’s financial position, it has the best chance of making the deal happen.
KR’s fuel business is also helping the bottom line now, but that could change with the price of oil, so it’s important to keep our eye on its other retail operations.
As a bonus, it also has the potential to grow its dividend, which isn’t reason alone to buy the stock, but it certainly helps to hang on to it.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
