Last week, Whole Foods Market, Inc. (NASDAQ:WFM) came within a dollar of its 52-week low. This came on the heels of a Barclay’s article that claimed the traffic decline at WFM was “staggering.” Its 3% drop equates to a whopping 14 million customers. One likely beneficiary of this misstep is Kroger Co (NYSE:KR), whose strong position in the industry should benefit KR stock holders.
Kroger is one of the largest retailers in the United States, operating nearly 2,800 retail food stores across 35 states and D.C. The company also runs 784 convenience stores and 323 Fred Meyer and Littman fine jewelry stores in 30 states.
Despite a competitive industry, KR stock has enjoyed significant financial success in recent years, with revenues increasing from $96.7 billion to $115.3 billion and EPS rising from $1.39 to $2.05 between fiscal 2013 and 2017.
A big factor driving this success has been superior customer service. The company was an early adopter of analytics, or “Big Data.” Big Data helps sift through the needs of customers and offer products and coupons based on those needs. KR also expanded organic offerings at prices lower than competitor WFM. Plus, the company utilized alternative sales channels and expanded its ClickList offering — a personalized order online and store pick-up service.
Industry conditions, including lower food prices, caught up with KR stock in the fourth quarter last year. This forced the company to report its first quarterly comparable store sales decline in 13 years. Further, same-store sales fell 0.7%, excluding fuel. These results were still better than the 2.4% decline in WFM’s comparable store sales, however.
A fast-growing supermarket chain with a much less mature store base, Sprouts Farmers Market Inc (NASDAQ:SFM), only managed a 0.7% increase in the quarter, so that’s a testament to just how tough the industry is right now.
KR did a good job of holding gross margins relatively stable, declining only slightly to 22.2% from 24.4%. Despite additional costs from acquisitions, the fall in operating income was just 9.2%. Share buybacks, which reduced the number of shares outstanding by 3.8%, limited the decline in per-share earnings to 54 cents from 57 cents.
Bottom Line on KR Stock
Looking ahead, the company does feel that earnings will be strongly positive by the third quarter, as food deflation will be factored into the year-over-year comparisons and benefits from cost savings from a voluntary employee separation program will kick in.
I am confident that Kroger can hit the high end of its guidance for the year and see EPS reach $2.35 in January 2019.
All in all, KR stock is a solid value. Once investors are convinced the deflation cycle is over, earnings growth will resume and KR stock will outperform.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.