Investors: Why Kroger Should Top Your "Grocery List"

Poor weather conditions across the united Stated have led to small gains in Kroger recently, but that's not the real reason long-term investors should consider the company for their portfolios. Read on to find out how the company is making the right strategic moves to reward its shareholders over time.

Jan 10, 2014 at 11:44AM

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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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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