The Only Grocer Worth a Second Look

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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.

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.


Operating Margin

Same-Store Sales Growth (exc. gas)

Earnings-per-share growth

SUPERVALU 2% (3.7%) (45.7%)
Ingles Market 3.7% (0.1%) (15.2%)
Roundy's 4.4% (3.3%) (27.6%)
Kroger 2.5% 3.6% 10.9%

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.

While Kroger didn't make the cut, another successful chain is one of the Fool's "3 Companies Ready to Rule Retail." This detailed report explores three great investment opportunities, just for Fool readers. You can get in on the action, so click here to download your completely free report, today.

Fool contributor Andrew Marder does not own any of the stocks mentioned in this article. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services have recommended buying calls on SUPERVALU. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 24, 2012, at 12:41 PM, djlresearch wrote:

    Ingles is not turning around and has been running horrible stores for years. But they are well managed and know how to survive with low volume stores on a shoe string budget.

    Roundy's is not turning around either. They will keep paying the dividend until the money has been milked and then sell assets to keep the dividend going. Perhaps a spinoff IPO for the Chicago stores. Risky but the stock price is fairly priced. The stock price will probably keep falling with each dividend but probably not much. I expect a net yield of 6-7% (dividend minus the drop in price).

    Super Valu - no valu, avoid.

    Kroger - boring and sterile IMO but well run. Benefits as Walmart puts all Krogers competitors out of business. My clients tell me they fear Kroger and feel Kroger is on the right track. They are losing share to Kroger. Minimal downside to Kroger, but they are not Whole Foods. Kroger should plug along and grow slowly but surely. Don't expect to double your money unless you are patient for 10-12 years.

  • Report this Comment On September 24, 2012, at 1:03 PM, Msherer wrote:

    Readers should go back over the last year and half on articles from Motly on SVU they will see how many of the "Fools" were so high on this stock and how giving up the dividend was not going to happen. And be sure to check out the score card on how many "Fools" were in favor of this stock....Fools struck out bad on SVU.

  • Report this Comment On September 24, 2012, at 1:14 PM, XMFRedRam wrote:

    Hey @djlresearch,

    Thanks for reading. I'm actually just finishing up a piece that aligns perfectly with your last point. I agree completely.

    Cheers, Andrew

  • Report this Comment On September 24, 2012, at 4:36 PM, djlresearch wrote:

    Most publicly held grocers are bad investments. The best and most profitable are privately held. Just because stock can be bought doesn't mean anyone has to buy it. Nearly all public grocers have debt, pay rent, union labor, and must dance for Wall Street. Just isn't a good business model. The debt free, rent free, union free grocers are the ones growing and thriving.

  • Report this Comment On September 24, 2012, at 4:51 PM, djlresearch wrote:

    I was a conference attended by some of the best grocer retailers in the USA. When asked who they fear, they all said Kroger.

    Kroger is kind of like "Rocky". Doesn't do anything particularly great but does a lot of things above average. They keep taking hits and more hits, and you can't seem to knock them down.

    They have benefited from Walmart driving out their weaker competitors. They have been staying away from making stupid acquisitions. All these troubled grocers, well everyone thinks Kroger will buy them out and rescue them. Don't count on it. Kroger knows the pitfalls of acquiring a less than ordinary competitor. Kroger is not going to be the next big gainer on the NYSE. But they will return better than putting your money in CDs. Those looking for a save 5% overall return, this is your stock. Those looking to get 10%, look elsewhere.

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Related Tickers

10/24/2016 4:00 PM
KR $31.18 Up +0.42 +1.37%
Kroger CAPS Rating: ****
IMKTA $41.30 Up +0.30 +0.73%
Ingles Markets CAPS Rating: **
RNDY.DL $0.00 Down +0.00 +0.00%
SVU $4.47 Down -0.03 -0.67%
SuperValu CAPS Rating: **