Investors: Why Kroger Should Top Your "Grocery List"

To say this has been a cold winter would be an understatement. Record-low temperatures have hit many areas of the country, and in parts of the north, this has been accompanied by severe snowstorms. When weather like this is approaching, what is the first thing most people do? They run out to the food store.

To broadly state that this took place at Kroger (NYSE: KR  ) would be nothing more than speculation, but there is proof of record sales in at least one area, which will be covered below. If record sales have been reported in one geographical area -- one where snow didn't even hit -- then it's likely that Kroger is going to report a strong top-line number for the quarter.

Accidental findings
I somehow managed to stumble upon Cincinnati dot-com while conducting research for Kroger. I found valuable information. 

According to reports, the threat of a snowstorm in Cincinnati and the surrounding area for Monday, Jan. 6 and Tuesday, Jan. 7 led to "cleared shelves and clogged checkout lines" on Saturday, Jan. 4. The Cincinnati Bengals game on Sunday, Jan. 5 also aided sales. Many football fans like to load up on beer and snacks prior to the game. But this was just a small factor compared to the weather. A Kroger representative stated that sales for the days leading up the anticipated snowstorm (which never happened) were greater than sales for the days leading up to Christmas.

In preparation for this event, Kroger doubled its supplies of milk, bread, cereal, beer, and snacks. That's a positive, but not all of the supplies arrived. Unfortunately, eight inches of snow did fall in Shelbyville, Ind., which is where Kroger's nearest distribution center to Cincinnati is located.

Due to inclement weather, Kroger's deliveries were disrupted. Therefore, while record sales were recorded at many area locations (Kroger has 110 stores in the area), sales could have been even higher. Another potential negative is that Kroger increased its workforce by approximately 33% leading up to the phantom snowstorm. This might have a slightly negative impact on the bottom line. However, upside potential for Kroger related to this event outweighs downside potential. And keep in mind that this doesn't include Kroger's other stores throughout the country.

Though this is likely a net win for Kroger, what about the big picture?

Market-share position
Kroger is the second-largest grocer in the United States, behind only Wal-Mart Stores  (NYSE: WMT  ) , which now generates 55% of its revenue from food sales. That's up from 53% two years ago. Wal-Mart might be the market share leader, and its increased offerings of organic and natural foods are a positive, but Kroger's recent purchase of 200 Harris Teeter stores will likely lead to increased market share gains in the Southeastern United States. This acquisition is also expected to lead to earnings-per-share appreciation of $0.06-$0.09.

And if we're comparing grocers, then we need to include Whole Foods Market (NASDAQ: WFM  ) . Whole Foods Market's meteoric rise has been directly connected to its natural and organic food offerings. Premium pricing has helped fuel the top line for Whole Foods Market. And since most Whole Foods Market stores are situated in middle- to high-end areas, that premium pricing hasn't dissuaded customers from visiting its stores. 

On the other hand, the low- to middle-income consumer makes up a much greater part of the population. And many of these consumers are value-conscious while also looking for natural and organic foods. This previously untapped market has now been tapped by Sprouts Farmers Market (NASDAQ: SFM  ) , which has a tag line of "Healthy Food for Less." There's just one potential problem.

Sprouts Farmers Market has enjoyed top-line growth of 28.6% over the past year. That fact alone tells us that upside potential is strong. The problem is that Sprouts Farmers Market is trading at 115 times earnings, making it very expensive for investors. It's entirely possible that Sprouts Farmers Market will grow into its expectations, but there is risk associated with it.

Personally, I think there might be some difficult times for the company and its stock over the near to medium term, but Sprouts Farmers Market is so on-trend and targeting such an in-demand market that its long-term prospects are likely good. 

What might surprise you is that while Whole Foods Market has seen top-line growth of about 6.2% over the past year, the more mature Kroger isn't far behind, with top-line growth of approximately 5.8% over the same time frame. Now consider that Whole Foods Market is trading at 37 times earnings, a premium to Kroger at 13 times earnings. Furthermore, Kroger offers a dividend yield of 1.7% versus Whole Foods Market's dividend yield of 0.9%.

The Foolish takeaway
Whole Foods Market is a solid company with good future potential, but its premium pricing strategy could lead to difficult times if the high-end consumer were to suffer in the future. It's also possible that Sprouts Farmers Market will steal share down the road. If you're considering an investment in Sprouts Farmers Market, just keep in mind that it seems expensive and expectations are very high.

Kroger's expectations aren't very high; it recently bought Harris Teeter, which should lead to market share gains; and inclement weather has led to record sales being reported in at least one geographical area. Conclusively, when you balance risk and reward, Kroger appears to be an option worth considering. 

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Read/Post Comments (4) | 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 January 10, 2014, at 12:27 PM, TMFPennyWise wrote:

    I've been a Kroger bull for the past couple of years as I've watched its strategy develop here in Cincinnati. And since you brought up Cincinnati.com as a source--I read in that paper that Kroger plans to build six of their 'Marketplace' (high end) stores in a ring around Dallas TX. That's getting pretty close to WFM home turf and I wonder if they're sending a message?

    Nice article. Thx. for posting.

    Jay

    Long on WFM and KR

  • Report this Comment On January 10, 2014, at 1:48 PM, skat5 wrote:

    I shop at a one of the Kroger storefronts owned by Kroger in AZ, called Frys. I regularly go to their flagship store, which is across the street from a Trader Joes and a Whole Foods and a mile away from a Sprouts and a Walmart. There is a definite war for the organic food dollar and in past year or so Kroger has, IMO, made a huge misstep in rolling out its lower quality 'simply human' certified organic produce, milk, and eggs, not fresh and imported from places like Mexico. These are noticably not as good and alternatives have disappeared. Hence I have stopped buying milk, eggs, and most produce from Kroger. I doubt I am alone in switching. Look to see their sales erode in organic in coming quarters.

  • Report this Comment On January 12, 2014, at 8:13 AM, Ostrowsr wrote:

    Kroger star rating should soon rise to 4 stars. Look for a new Harris Teeter or Kroger coming to a neighborhood near you. And all the growth that comes with it.

  • Report this Comment On January 13, 2014, at 1:40 PM, BioBat wrote:

    Kroger wasn't the only chain devoid of supplies during last week's weather in the midwest - every chain was out of stock - Whole Foods, Meijer, even Costco couldn't keep their shelves stocked. The accidental finding applies no more to Kroger than it does to any other chain.

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