Kroger Co Remains Many Things to Many People

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Kroger - Kroger Co Remains Many Things to Many People

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The reason Kroger Co (NYSE:KR) remains undervalued can be explained by a single story out of North Carolina.

The story is that grocery chain is putting its Raleigh-Durham operations under its Harris Teeter subsidiary, but the headline is quite different. “Kroger closing all its stores in ‘oversaturated’ North Carolina market, 1500 losing jobs.” 

Uh, yes. Uh, no. Uh, sort of?

Of the 14 stores being closed, eight of them are being “bought” by Harris Teeter.  Harris Teeter is a unit of Kroger. KR executives are sitting on both sides of that table.

What is actually happening is Kroger is ditching union workers for non-union ones. Harris Teeter successfully opposed a move by union organizers after its acquisition by Kroger.

So, the story is that grocery chain is cutting costs by replacing union jobs with non-union ones. But the impact of this on Kroger branding is wholly negative.

Kroger Is Cheaper Than Chips

KR has long been cheaper than a sack of potato chips. It has a market cap of under $21 billion despite $122.6 billion in sales during its most recent fiscal year, up about 6% from the previous year’s $115.3 billion. Kroger is also profitable, with net income of $1.9 billion last year. Kroger will even give you a Curtis Jackson to own it, a 50-cent per share annual dividend yielding 1.97%.

The problem is you don’t know what Kroger is. It has many brands around the country, not just Harris Teeter but Ralph’s in California, Fred Meyer in Portland and Dillon’s in Kansas. It simplified things just a bit by selling a bunch of convenience stores to a British private equity group in February, for $2.15 billion, money that will either reduce its $12 billion in long-term debt or give it a cash cushion.

But what is Kroger? Kroger is Fry’s Food and Drug in Arizona, it’s King’s Soopers in Colorado and Wyoming. Kroger is Mariano’s in Chicago, Roundy’s in Milwaukee, Smith’s Marketplace in Utah and Owen’s in northwestern Indiana. Do you buy organic at Lucky’s Market? You went to a Kroger. Did you save money at Ruler’s Foods in Ohio? That’s a Kroger, too. 

By moving assets around these units, as it did in North Carolina, KR can generate some financial benefit. But it can’t run a national ad. It’s like the old Federated Department Stores, which became Macy’s Inc (NYSE:M) in 2007. Federated was, like Kroger, based in Cincinnati.

Amazon.com, Inc. (NASDAQ:AMZN) bought Whole Foods last year for $13.4 billion, at a time when Whole Foods had sales of under $16 billion. For just $10 billion more — not much in the Amazon way of doing business — it could have gotten a company 10 times bigger.

But it didn’t. The reason should be clear. In Kroger, it would have been buying a mess of systems, fiefdoms, supply chains and ways of doing business. With Whole Foods, it bought one thing, one chain.

The Bottom Line on Kroger

It’s hard to tell Kroger to get itself together when it’s obviously deriving some benefit from being many different things to many different people.

The image of a Fred Meyer shopper going to the department store is quite different from a Mariano’s customer heading out to pick up some prepared dishes. Harris Teeter and Kroger bring different images to mind.

Regional chains can succeed in their markets, if they have autonomy, if they own themselves. Privately held H.E.B. in Texas is a great example. But if you’re going to seek money from the public markets, you need a singular identity, which Kroger lacks.

Maybe private equity needs to come in and fix this mess.

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.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/kroger-co-kr-stock-remains-many-things-many-people/.

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