Investing in Kroger (NYSE:KR) today could be like investing in Walmart circa 2015. Wall Street is looking for Kroger stock to prove that in this week’s expected earnings report.
Like Walmart in the past, Kroger has a relatively high market share and is investing tremendously in e-commerce. Also like Walmart five years ago, many investors view Kroger as a slow-growth or no-growth dinosaur, resulting in a low valuation for its stock.
Given these similarities, I believe that Kroger stock, which also has a couple of other positive drivers, is likely to follow in the footsteps of Walmart and rise meaningfully in the next few years.
Kroger’s Market Share and Tech Investments
Kroger had a 9% share of the U.S. grocery market as of last September, trailing only Walmart’s 26% share, Euromonitor reported, according to Forbes.
Moreover, showing the company’s competitive strength, Barron’s notes that the grocery chain has the highest or second-highest market share in about 90% of its markets. Nine percentage points may not sound like a lot, but it’s a fairly big base upon which Kroger can build. At the same time, Kroger has plenty of room to raise its market share.
The grocery chain is looking to do just that by investing in e-commerce and other tech initiatives. From 2016 to 2019, Kroger spent a great deal on boosting its e-commerce capabilities.
Further, as of September 2019, the company had implemented pickup and delivery services at 1,780 and 2,225 locations, respectively. All the investments have paid off, as Kroger’s e-commerce sales jumped 31% year-over-year in its quarter that ended in August. In fiscal 2018, its e-commerce sales rose 58%, following a 90% surge in FY17.
At a time when many grocery chains are suffering from anemic same-store sales growth or same-store sales declines, Kroger’s same-store sales (SSS) continue to climb significantly. Moreover, its growth appears to be accelerating.
For example, in the company’s Q3, its same-store sales jumped 2.5% year-over-year. That was meaningfully higher than the 1.7% SSS growth that the company reported for the same period a year earlier. And on the bottom line, the company expects its EPS to climb 4%-6% this year. I think that Kroger’s large investment in its e-commerce operations is a key reason for its overall success.
The company continues to invest in e-commerce, as well as in other technologies. For example, it’s automating its warehouses, experimenting with driverless delivery in Houston, and using video analytics to boost its marketing capabilities.
Over the longer run, I believe that the company’s ongoing investments will cause its SSS gains to accelerate, enabling its profits to climb meaningfully and generating significant profits for the owners of KR stock.
Other Promising Initiatives
Kroger’s revenue from private-label products is climbing significantly. In Q3, its revenue from its private-label products surged 3.4% YOY. In 2018, its private-label brands generated an estimated $1.2 billion of annual sales, and Wells Fargo predicted that the number “may double” in the next few years.
Private-label products likely carry higher margins than those that the company purchases from national brands because a number of middlemen, including wholesalers, are cut out of the equation. As someone who frequently shops at Kroger’s I can report that its private-label food is, on the whole, quite tasty and affordable.
Further, the company apparently continues to innovate when it comes to its private-label food; in January, it launched new, plant-based meats. Kroger’s new, private-label plant-based meats alone could move the needle for the company’s results and Kroger stock.
Meanwhile, at least at my local Kroger’s in a Dallas suburb, a wide variety of inedible products are available, ranging from clothes to kitchen appliances to toys. These products probably carry meaningfully higher profit margins than food and likely help meaningfully boost the company’s revenue and profits.
Wall Street Will Warm Up
Warren Buffett’s company, Berkshire Hathaway (NYSE:BRK.A), recently bought $549 million of Kroger’s shares. In the wake of Berkshire’s move, more large investors are likely to buy more of Kroger’s shares.
Meanwhile, research firm Evercore recently upgraded Kroger to “outperform” from “inline,” saying that the company’s “improving comps and moderating investment spend do not appear reflected in valuation and stock performance.”
Evercore set a $33 price target on the shares, well above the stock’s current level of $29. The upgrade should also make some large investors more upbeat on Kroger’s.
Finally, the stock is a good name to own as concerns about the coronavirus from China are pushing down most stocks. Whatever happens with coronavirus, almost everyone will still have to get food from supermarkets. Perhaps that’s why, as the rest of the market has plunged this week, Kroger is only down 1.8% in the last five trading days.
The Bottom Line on Kroger Stock
The chain’s investments in e-commerce and other technologies have paid off and will continue to do so, making it similar to Walmart circa 2014.
Additionally, the company has other promising initiatives, while Wall Street is warming up to it and it’s relatively immune to coronavirus concerns. Finally, the shares are trading at a low forward price-earnings ratio, based on analysts’ average estimate, of 12.67. Given all of these points, investors should buy Kroger’s shares.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.
