A year ago, the market was writing off America’s largest grocer Kroger (NYSE:KR) as yet another victim of Amazon (NASDAQ:AMZN) after the e-commerce giant acquired Whole Foods Market. Amazon announced the deal in June 2017 and by October, KR stock had lost more than 30% to hit the $20 level.
If anything has become clear since then, it is that those fears were grossly overstated. Plain and simple, Kroger is a survivor. As it turns out, consumers don’t really care if Amazon owns Whole Foods or not. Because grocery stores have been around for so long and grocery shopping isn’t anything new, consumers already have their favorite grocery store. A few price cuts here and there, or some new technology integration, isn’t going to change decade-old shopping habits.
As such, not much has changed about Kroger’s operational results since Amazon acquired Whole Foods. Comparable sales and net sales growth have continued to hover in the positive low-single digit range without much variance. Because of this continued growth, KR stock has rebounded from the Amazon-led sell off, and is now trading near $30.
Even at these levels, Kroger stock looks compelling as a long-term investment. The Cincinnati-based company increasingly looks like a long-term winner because it is becoming more relevant, more dynamic, and overall a better grocer through multiple growth-related initiatives. Meanwhile, the stock is still cheap. The shares have a price-to-earnings ratio of 6.5, while the S&P 500 index is at 18.8x. KR stock’s five-year average PE is 16.6x, so there’s room to grow.
A cheap stock coupled with favorable growth trends imply that Kroger stock has healthy runway in a multi-year window.
Kroger Increasingly Looks Like A Winner
The simple truth about Kroger is that this company is a survivor, and that the proof is in the numbers.
In 2016, prior to the Amazon-Whole Foods deal, Kroger’s comp sales growth was 1%. It slipped to 0.7% in 2017, concerning some investors that Whole Foods was stealing market share. But, comparable sales growth ran up to 1.9% in the first quarter of 2018 and 1.6% in the second quarter. Moreover, the metric is expected to be in excess of 2% this year.
Let’s put that in context: Kroger hasn’t reported comparable sales growth in excess of 2% since 2015. The grocer is set to report a three-year high comparable sales growth number in the first full fiscal year after Amazon acquired Whole Foods. If that doesn’t scream “survivor,” I don’t know what does.
But, Kroger is doing more than surviving. They are actually thriving. Again, this company is projecting to report a three-year high comparable sales growth number against what is supposed to be rising competition.
How is Kroger thriving? The company is dramatically and rapidly improving itself. For starters, management is leveraging data to remodel stores to have more efficient product placement and be more aesthetic. The company is also building an automated warehouse in Cincinnati to improve operational efficiency. Meanwhile, Kroger is expanding a partnership with Walgreens (NASDAQ:WBA) to push Kroger goods through Walgreens stores in an attempt to widen reach and enhance customer convenience. Along these same lines, Kroger is expanding into toys and building out grocery delivery in order to improve the company’s convenience value prop as a one-stop shop with a growing digital presence.
All together, Kroger is making all the right moves to ensure a brighter future in an increasingly competitive grocery landscape. These moves are working in the near term (2%-plus comps expected this year). And, they’ll continue work into the future. That’s why KR stock increasingly looks like a long-term winner.
Shares Have a Runway
At this point, it’s pretty clear that Kroger is a stable growth company in the long run, supported by strong customer loyalty and continued business innovation.
Under that broad assumption, it is reasonable to assume that current low single-digit revenue growth rates persist over the next several years. It is also reasonable to assume that margins start to stabilize, but not dramatically improve because of the increasing influence from lower-margin digital sales. Assuming low single-digit revenue growth and margin stabilization alongside consistent buybacks, Kroger could easily do about $3 in EPS in five years.
Normally, Kroger stock trades around 15 times forward earnings. An average 15 forward multiple on $3 implies a four-year forward price target of $45. Discounted back by 10% per year, you are talking about a year-end price target of just over $30.
Long-term fundamentals support Kroger stock up around $30. At levels below that, and against an increasingly favorable operational backdrop, the shares look like a compelling buy.
Bottom Line on KR Stock
Due to the company’s resilient growth numbers and broadening business scope, Kroger stock increasingly looks like a long-term winner. Long-term winners should be bought when the price right. Below $30, the price is right for KR stock.
As of this writing, Luke Lango was long AMZN.