Kroger Puts the "Super" Back in Supermarket

Ladies and gentlemen, put away those mops and get your finger off the intercom button -- there will be no need for a cleanup in Aisle Four this evening. Surprising investors with another quarter of better-than-expected earnings, Kroger (NYSE: KR  ) continues to show why it is the hands-down best supermarket play.

While rivals SUPERVALU (NYSE: SVU  ) , Safeway (NYSE: SWY  ) , and Wal-Mart (NYSE: WMT  ) continue to trip over their own shoelaces, Kroger has implemented effective cost-saving initiatives and translated them into customer-driven sales growth. Being proactive rather than reactive, Kroger demonstrates that even in a stagnant spending environment it can rake in the profits.

Kroger's quarterly report, filed yesterday, showed that the company was able to cut costs on energy usage in its stores, as well as in product distribution, and used these cost savings to reduce prices on some of its groceries so as to drive consumer traffic. What's really impressive is that the company was able to trim its prices without hurting its margins, while also being able to pass along inflationary price increases to its customers in other areas.

Another large push to install gas stations at its supermarket locations also appears to be paying off. It's no secret that consumers appreciate the convenience of being able to fill up locally, as well as the membership perks that are attached with shopping at a Kroger-affiliated supermarket. Although the margins are relatively thin on its gasoline sales, it's yet another product that the company is offering its consumers that might as well be a necessity.

For the quarter, revenue rose 11%, (or 5% if you exclude gas sales), while comps for stores open at least five quarters jumped an impressive 4.6%.

SUPERVALU and Safeway have both had a nice stretch recently, but I have to wonder, with SUPERVALU's erratic earnings history and Safeway's slower growth rate, whether they can keep up with Kroger. Wal-Mart's size allows it to undercut Kroger in pricing, but it has been unable to pull market share away from the United States' largest traditional grocery chain.

This hasn't been a one-quarter phenomenon for Kroger, either. The company has equaled or surpassed analyst expectations regularly for the past six quarters, which has allowed Kroger the ability to reward its shareholders with a five-year compounded dividend growth rate of 10%.

Kroger appears to be making all the right moves. Its dividend is increasing, its costs are in line, and it's able to pass along price increases to consumers. Risk-averse investors with a long time horizon may want to give this consistent growth story another look.

Would you put shares of Kroger in your shopping cart? Why or why not? Share your thoughts in the comments section below and consider adding Kroger to your watchlist to keep up on the latest news with these grocery chains.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Wal-Mart and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Wal-Mart and calls in SUPERVALU, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that offers its members the reward of transparency.


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