Kroger Co (NYSE:KR) is due to report earnings after the market closes March 2. Investors are hoping for earnings of 54 cents per share and revenue of $27.3 billion, which would be a nice bump from the 41 cents of profits and $26.6 billion in revenues of the previous quarter. Despite this, investors are dumping KR stock like it has a disease.
Shares are down 18% since this time last year, bringing the price-to-earnings multiple on KR down to 15.35 — well below the market average. And that’s despite a hike in the dividend to 12 cents per share of Kroger stock, which now throws off a yield of 15%.
That dividend, by the way, is covered four times by earnings.
What’s going on? I call it Amazon-phobia, an irrational fear of Amazon.com, Inc. (NASDAQ:AMZN).
Kroger Isn’t Just Kroger
Don’t get me wrong. I love Amazon. I own the stock, I am a Prime member. There are some things I’ll never go out for again, like books and music. (Sorry, Barnes & Noble.)
But there are also things it’s just easier to go out and get rather than wait for them to come to you. Food is one of those things, especially fresh food. Milk, tortillas, ice cream, beer, gasoline — I am not getting them from Amazon today, and probably never will.
Kroger also has a strategy for taking on Amazon. It is cutting costs in its low-end businesses, essential goods that are price sensitive, while quietly moving upscale.
Kroger recently signed a master agreement with McLane Co., a unit of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), to stock most of its convenience stores. Almost half of its nearly 3,000 grocery stores also sell gasoline, a huge cash generator. The convenience stores are a hidden strength. Rebranding them with the Kroger name might reveal that strength.
Kroger also has vertical integration. There are 40 Kroger food processing plants around the country, baking and packing and shipping dairy products. This cuts costs and enables margins that can spur a bit more optimism in KR stock.
More important, don’t think Kroger is just Kroger, and look at who is Kroger now.
Ralph’s in California has been Kroger for decades. Fred Meyer in Portland has been Kroger this entire century. More recently, Harris Teeter in North Carolina became Kroger. Then Mariano’s in Chicago became Kroger. Now, even Murray’s Cheeses in lower Manhattan is Kroger.
The recent acquisitions are all up-market chains, with a cachet of quality, and operate independently of the main company.
Amazon-Pobia Hits All Retail
The assumption that Amazon, whose $135 billion in total revenue for 2016 still means it has smaller U.S. retail volume than Kroger’s $109 billion, is about to gobble up all retailing is pervasive in the stock market, and has hit all retailers hard.
Wal-Mart Stores Inc’s (NYSE:WMT) market cap, for instance, is $218 billion while its 2016 sales came in at $485 billion. KR’s market cap of $29.25 billion is barely more than this coming quarter’s sales volume. It used to be common for retailers to generate $1 in market cap for each $2 in sales. Now only Target Corporation (NYSE:TGT) gets close, and despite a dividend yielding 3.6%, Goldman Sachs is screaming sell, sell, sell!
One of two things are going on, in my view. Either retailing is signaling an imminent recession, in which Kroger is already adjusting to a new, harsher reality, or the retailing sector in general is undervalued.
Companies that aren’t focused on efficient supply chains and building up market brands have reason to fear Amazon, and a recession. Kroger does not.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
