Why Is Kroger (Still) So Cheap?

At a time when the average stock in the S&P 500 sells for 25 times earnings, there’s one that sells for 9. When even mediocre companies are priced over $100, you can get it for $34. It will even pay you, just to own it. The company is Kroger (NYSE:KR), and the stock is KR stock.

A Kroger (KR) logo on a building.

Source: Jonathan Weiss / Shutterstock.com

Kroger is at the heart of every big trend in retailing, but the shares have barely budged. Analyst complaints are being fixed, but analysts still offer no love. The whole market seems to have passed KR by.

Why, Kroger, Why?

Do you want a shopping cart that checks you out without a clerk? Kroger has that. How about a whole store without checkers? They’re testing that. Do you like buying groceries from home? Kroger allows customers to do that. How about ghost kitchens? Kroger supports that.

Kroger is winning the digital race, according to Progressive Grocer. It’s one of the 100 best places for a technologist to work. Its online sales zoomed during the pandemic, but the shares remain below where they were in August.

I love to write about how house brands are driving Target (NYSE:TGT). Kroger has been stocking them for decades. They represent 18% of industry sales, and Kroger’s private brands are selling faster than average. But still, the stock remains stuck in neutral.

In recent years Kroger has even fixed what was my main bugaboo, the lack of a cohesive identity. Kroger sold out of its strange collection of convenience stores. All its groceries now feature the same brand message, “Fresh for Everyone.”  New ads from DDB New York and Cesar Pelizer are drawing rave reviews.

Yet Kroger was worth more five years ago than it is today.

Slow Growth

Back when Kroger last split its stock in 2015, it was America’s second-largest grocer, behind only Walmart (NYSE:WMT), with more than $100 billion in sales. Today, it’s at $130 billion, but it’s now number three, after Costco Wholesale (NASDAQ:COST) passed it.

Kroger ads may be innovative, but its public relations effort keeps stepping on its own feet.

President Joe Biden recently asked employers to provide “hazard pay” for essential workers. Long Beach, California wrote that into law. Kroger responded by closing two stores there. Never mind that six remain open or that the two stores were underperforming. Kroger leaned into the controversy and gave itself a huge black eye.

Still, Kroger sales should grow 6% this year, making its 18-cents-per-share dividend affordable. That’s a yield of 2.16%, while even U.S. 30-year bond rates remain below 2%. 

Yet none of the 14 analysts following Kroger at Tipranks are telling you to buy it. Most have it in the wishy-washy “hold” category, and two suggest you sell. The average price target is where it’s selling now. It’s just not considered a buy.

The Bottom Line on KR Stock

There are some people who like KR stock. The yield is reasonable, and Kroger pays out just 18% of earnings. 

But bears are calling the pandemic-induced gains a “once in a lifetime” convergence. Kroger still suffers from a welter of regional brands. The California stores that are closing over hazard pay are a Ralph’s and a Food4Less.

Consider. Walmart is growing its top line even more slowly than Kroger and its yield is lower, yet the stock has outperformed it. Kroger is selling for less than 20% of its sales, Walmart for nearly 80% of its.

Kroger is like the Loch Ness monster. It’s a sasquatch among stocks. Some mysteries just abide. At least you’re getting that dividend.

At the time of publication, Dana Blankenhorn owned no shares (directly or indirectly) in any companies mentioned in this article.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 

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