Kroger Co (NYSE:KR) has become the most undervalued company in America. That’s not a buy call on KR stock. It is undervalued because it may be among the worst-run retailers in America.
Kroger should be doing quite well. With sales of $115 billion last year, they are the third-largest retailer in the country — fourth, if you count Amazon.Com Inc. (NASDAQ:AMZN). The Cincinnati-based retailer had more net income than Amazon last quarter. It is not growing fast, but it continues to grow.
Trouble is, no one wants Kroger stock. Its value is down 34% over the last year, despite a nice, affordable dividend now yielding 2.42%. The shares are selling for less than 13 times earnings, and 14% of sales.
Things are so bad, KR stock jumped 5% on news Kroger might dump its convenience store business.
What the What?
Chief Financial Officer Mike Schlotman made the announcement, saying the stores are getting premium multiples, and that’s why he is exploring a sale.
This is precisely what a financial guy would say, which illustrates the problem. Kroger is being run by financial guys instead of marketing guys.
You know what a marketing guy would say? (Or gal, this is a business that could really use female leadership.) They would say: “This is where our customers are going.” And, they would ask: “What if we really served them?”
What if, instead of being Kwik Stop in Iowa, Loaf n’ Jug in Colorado, Tom Thumb in Alabama, and Turkey Hill in Ohio, we were Kroger everywhere? What if we were selling gas with a solid mix of groceries, the way operators like Holiday does in Minnesota, or Wawa in Pennsylvania, or Sheetz does in Virginia, or QuikTrip does where I live in Georgia?
You know what those operators have in common? They’re privately owned, except for Holiday, which was bought by Alimentation Couche Tard Inc (TSE:ATD.B) in July. Couche Tard, by the way, has almost twice the market cap as Kroger with one-third the sale volume. Hint, hint.
Kroger could, with some investment, instantly be bigger than all of them — it could be better than all of them — with a national footprint, better pricing and selection from the grocery outlets, plus gas.
Even if people aren’t running to the grocery store, they’re still buying gas. Convenience stores carry a premium price because they’re worth it. And this is the business Kroger is running away from? C’mon, man!
Marketers and Activists Wanted
This is the kind of company activist investors should be buying, the kind that can be turned around with one simple change. Put marketing guys in charge of it.
Marketing guys would see the value of using a single brand, or possibly two (as Macy’s Inc (NYSE:M) does with Bloomingdale’s) to get oomph from advertising. Marketing guys would move assets to customers, and seek to become the very best choice for food of all kinds, rather than running vanilla stores with boring food that demand people come to them.
If Bill Ackman or Nelson Peltz wants to make some serious coin, this is how to do it. If Kroger were valued like Costco Wholesale Corporation (NASDAQ:COST) or Wal-Mart Stores Inc (NYSE:WMT), at half its sales or a little more, it would be worth $65 billion, not $18 billion. If Kroger were valued like Couche-Tard, that value would be $110 billion. That’s nearly a 10-bagger, guys!
Right now, analysts are as bored with Kroger as the retailers customers are. More than half rate it as a “hold,” which means they have no idea what to say about it.
I know what to say about it: Buy 5% and launch a proxy fight. With 80% of KR stock in the hands of institutions, and less than 1% held by insiders, it’s a fight that you can win.
This is not Proctor & Gamble Co (NYSE:PG), a well-run outfit with a market cap of $237 billion bringing nearly $1 of every $4 in sales to the net income line. This is a job that needs doing.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
