The Only Grocer Worth a Second Look

In grocery stores, I buy things that I'm pretty sure I'm going to like. If it looks like that snack is a combo of chocolate and peanuts, I'll give it a shot, even though I've never heard of it. If it looks like fermented fish and pretzels, I keep walking. My approach to grocery stocks isn't much different. Is the company growing, does it have a plan, is it making money? Let's make a deal. Is it falling apart, hemorrhaging cash, turning over its board every two weeks? I'll pass. Here are three of the offenders, and one stock to toss in your cart.

A short shelf-life
Two of the grocery chains that have investors talking the most are Roundy's (NYSE: RNDY) and SUPERVALU (NYSE: SVU). Much of that excitement comes from the discounted nature of the companies' stocks. Roundy's is trading just above its 52-week low, and has a forward P/E of 6. SUPERVALU is even "cheaper" -- in the same way that discounted expired food can seem cheap, until you end up in the doctor's office counting the tiles on the bathroom floor -- with a forward P/E just under 4.

But there's a reason both companies are in such a weak position. Not surprisingly, investors are not hopeful. For SUPERVALU, part of the reason investors are worried is the company's huge debt burden. Right now, its debt-to-equity ratio is a horrific 10,214%. That's so skewed that it looks odd in print. By comparison, Roundy's has managed to keep its debt down to a manageable 232% of its equity. That, at least, is more in line with competitors like Kroger (NYSE: KR) and Ingles (Nasdaq: IMKTA), which both have ratios below 225%.

Roundy's problem is its positively lackluster performance, and its inability to predict its own future. Between its first and second quarters, Roundy's revised down its sales growth, same-store sales, EPS, and EBITDA projections. Even now, the lower numbers look optimistic. The main thing keeping investors interested is the company's strong dividend. That dividend is one of only three positive things that Fool writer Dan Caplinger has to say about Roundy's.

Competition
But SUPERVALU and Roundy's aren't the only stocks on the shelf. Competitor Ingles is also having a challenging 2012. The chart below compares the three troubled grocers with Kroger added in as a point of reference.

Source: Most recent quarterly results, Yahoo! Finance and official press releases.

As you can see, Ingles was basically flat on same-store sales growth, which is great compared to Roundy's and SUPERVALU. But take a look at Kroger, on the flip side, where same-store sales growth is actually positive. In this case, same-store sales are driving earnings-per-share growth, and placing Kroger ahead of the pack.

The bottom line
The consistency that Kroger has managed to put up is the reason I'm choosing it over the field of competitors. SUPERVALU and Roundy's are in a bad place, while Ingles is just floating along. While I can see investing in Roundy's for the dividend, or in Ingles for a turnaround play, I just don't have confidence that things are going to get substantially better anytime soon. SUPERVALU is just out of the picture for me. The company's most recent quarterly earnings release was long on excuses and short on solutions.

On the other hand, Kroger has continued to manage its operations and sales growth with a clear path in mind. Last week, the company announced a 30% increase in its quarterly dividend. That's part of a dividend-increasing trend that has been in place since dividends were reinstated in 2006. Kroger is the chocolate-and-peanut snack sitting on the shelf, tempting investors. I have no reason not to pick it up and take a bite.

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