1 Great Grocery Stock

Grocery chain Kroger (NYSE: KR  ) has announced a new plan, and with the new plan, a new goal for growth. The move has inspired investors, and the company's stock was up 4.5% at midday after the announcement. The company focused on its strong run over the past few years, job creation, and capital allocation, and detailed its plans for accelerated growth over the next five years. Here's a breakdown of the new situation, the competition, and what it will mean for investors in the future.

The plan, in detail
Kroger put the big guns up front, changing its long-term growth forecast from its original pace of 6% to 8% per year to a new goal of 8% to 11% per year. That growth is in earnings per share, and while we'll get into the revenue side in a moment, Kroger also increased its share repurchasing plan by $160 million to $500 million. Before we get into the detail, let's look quickly at how the share repurchase affects this.

If Kroger's revenue stayed at its 2011 level, $602 million, and the company just repurchased shares at today's price, it would increase EPS by almost 4%. So between a third and a half of the income growth that Kroger is predicting is going to come from that repurchase plan. That's great news for investors, because it means that Kroger only needs to grow its income by a little over 4% in order to hit its new EPS goal.

To achieve that bottom-line growth, Kroger is going to continue its footprint expansion, grow its digital offerings, and modify some of its store formats. That last move has been popular with a number of stores recently. In particular, Target (NYSE: TGT  ) has seen success with its new City store model, which is designed to cater to the needs of urban dwellers and to fit in a smaller footprint. The smaller stores have an emphasis on apparel and products that pop-in customers might need.

While Kroger's plan is to increase its EPS over the coming years, it reconfirmed its 2012 guidance in the announcement.

Competition all around
Kroger is the leader in traditional grocery chains, which means that it's one of the only traditional grocers that's in any place to compete with new chains like Whole Foods (Nasdaq: WFM  ) and The Fresh Market (Nasdaq: TFM  ) . Both companies have been on a tear this year, and last quarter they both grew same-store sales by 8%. While Kroger has grown its market share to 21% over the last five years, it only grew same-store sales by 3.6% last quarter. That compares favorably to peers, many of whom have watched sales drop recently, but it's not enough to keep it ahead of the new chains for long.

In looking at the traditional grocers, however, it's immediately clear that Kroger is doing something right. Its most compelling rival is Safeway (NYSE: SWY  ) , but it's a distant second. Safeway announced its third-quarter results last week, and while EPS grew, revenue fell. In part, the decline was a result of Safeway's inability to meaningfully grow its same-store sales, which rose only 0.1% last quarter.

The future of Kroger
What Kroger has done well is manage its customers. According to its press release, Kroger loyalty cards are owned by almost half of U.S. households, and 85% of households in markets where Kroger has a store. That's an incredible metric, and it points to the value that customers seem to be deriving from Kroger. While it's competing against Whole Foods now, it's doing a very good job of understanding how it's a different store and what it is that consumers want from it.

Kroger might be losing market share to these new grocers, but it's also ripping it from the hands of other traditional grocers, and that's enough for me. Kroger isn't ever going to grow as quickly as Whole Foods, but this new plan is a great halfway house. Instead of sitting idly by like Safeway, Kroger is making something of its customers and the data that it's collecting from them.

Right now, Kroger is trading at a forward P/E of only 9.5, which is cheap compared to Whole Foods and The Fresh Market. The obvious trade-off is that Kroger is going to grow more slowly than either of its high-end competitors. But I like Kroger's recent growth, and I think that it's going to easily clear its new growth goals. However, if you're looking for a faster growth engine, check out the Fool's new premium report on Whole Foods. It details the challenges and opportunities that the company has in store, and it highlights three areas you have to watch if you're going to invest. Click here to get your report today.

Fool contributor Andrew Marder has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend The Fresh Market and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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