Buy Kroger for the Best Growth in Grocery Stocks (KR)

There has been a lot of talk this year about the bigger-is-better mergers and acquisitions activity in biotech, chipmakers and healthcare insurers, but few have mentioned the heat in the grocery store space.

Buy Kroger for the Best Growth in Grocery Stocks (KR)Yes, grocery stores. Specifically Kroger (KR), which is turning out to be the Apple (AAPL) of the bunch.

While the S&P 500 continues to flounder at a loss of more than 3% year-to-date, KR stock is up a whopping 15% — that beats Walmart (WMT), Target (TGT) and Whole Foods (WFM), which (with the exception of TGT) are all posting YTD losses.

It seems like Kroger is the rare kind of growth you’d actually be happy to stumble upon in a grocery store.

Imitation Is the Sincerest Form of Flattery

Walmart is aggressively positioning its Neighborhood Market stores into more urban markets to steal market share from stores like Whole Foods, while Target is developing same-day grocery delivery service in conjunction with Instacart to counter Amazon’s (AMZN) progress in delivery-based grocery sales.

Meanwhile, TGT recently begun delivering select items in Minneapolis as a test before expanding the concept. (Instacart also works with WFM on a similar model in San Francisco.)

Giant supermarket’s Dutch owner, Ahold (AHONY), just bought Food Lion’s Belgian owner, Delhaize (DEG), in a deal that will make it the fourth-largest grocer in Europe, and with a 4% market share in the U.S.

AHONY also owns Southern chain Martin’s and delivery service Peapod.

But ahead of most of these deals and initiatives, KR was leading the way.

Kroger bought Harris Teeter in 2013 and completed the merger in early 2014. And now it already has paid off the debt incurred for that merger, and its $237 million purchase of Vitacost, a health supplements and beauty care company.

So while the competition is gearing up for new initiative into the grocery space, KR is already consolidating its acquisitions and maximizing its opportunities. And its most recent earnings report illustrates just that.

“Earnings Beat in Aisle Three”

Same store sales — one of the most important metrics for a grocery store’s profitability — beat KR management’s previous forecast and trounced the industry average. SSS for the quarter came in at 5.3% — that’s about five times higher than WFM’s SSS. In comparison, Food Lion’s SSS was 2.5% in the most recently reported quarter.

And management once again raised its outlook for the year: At the beginning of the year, KR expected 3.5% sales growth for 2015. Three months ago, management raised it to 4%. Now, it’s expecting 4.5%. Compare that to AHONY, whose sales growth was 1.4% in the most recently reported quarter.

KR is firing on all cylinders, and is well positioned for the competition once it figures out the most profitable avenues in the sector. KR’s mergers help on two significant levels. Its Harris Teeter line gives it exposure to more aspirational consumers that are willing to spend up to buy quality — that means higher margins for Kroger.

And the acquisition of Vitacost means KR can now produce its own brands of vitamins, supplements, beauty and healthcare products, which are also very high-margin products. Both of these lines hold great promise moving forward for America’s largest grocery retailer.

KR is also going to compete toe-to-toe with WMT and TGT with its own line of organic and health foods as well. TGT has made no secret of its intentions to move aggressively into this space, and WMT is also using its Neighborhood Market stores for that purpose. Again, organics and health foods command significantly higher margins than conventional produce and foods.

Also, lower fuel costs helped boost profits for KR. About half of its U.S. stores have fuel centers on the property and offer discounted fuel for Kroger members. As long as low gas prices hold out, this will be a very helpful segment of KR’s overall business.

Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily 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, Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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