Which of These 3 Supermarkets Should You Buy?

Kroger’s large network and Whole Foods’ opportunity in organic food make these two stocks worth a look.

Jan 22, 2014 at 3:40PM

For retailers across all segments, comparable-store sales are the strongest indication of whether or not they are connecting with their respective target customers. If a retailer has had a strong track record of posting positive comps, there's no doubt that it has connected well with its customers.

Before curiosity kills, I am talking about Kroger (NYSE: KR), one of the largest grocery retailers. It's also the largest supermarket operator in the U.S., ahead of Safeway (NYSE: SWY). Kroger has done very well as of late and looks set to get better. Since the cost of switching grocery stores is very minimal (if there's a cost at all), the retail space is highly competitive with a plethora of grocers. Because of this, we will also look at Whole Foods Market (NASDAQ: WFM), the undisputed leader in the organic and natural produce segment and the first and only U.S. public food retailer to commit to labeling genetically modified organisms (GMOs .)

A closer look at Kroger
Kroger's third quarter registered positive comps of 3.5%, making it the 40th consecutive quarter of positive comps. This is no mean feat and is the result of Kroger's customer-centric business model. The company is well positioned to continue its growth momentum as well. On the back of comps growth, Kroger's third-quarter revenue jumped 3.2% over last year to $22.5 billion .

The company's customer-first strategy and the strong progress to improve the fresh products segment has been one of the growth drivers. The customer centric business model has, over a period of 10 years, been responsible for an 83% increase in loyal households that keep visiting Kroger for their grocery needs. Focusing on the loyal brand of customers has been one of the driving forces behind the 40 consecutive quarters of positive comps, and it is all set to sustain the momentum into 41st.

Kroger is confident of its growth going forward because it is capturing only $0.50 of every $1 the loyal customer spends on products that the company sells. It is confident of achieving its fiscal 2013 earnings per share target and projects comps growth of 3% to 3.5% (excluding fuel) for the fourth quarter. For fiscal 2014, it is confident of delivering 8% to 11% earnings-per-share growth targets, which does not include the accruals coming in from the Harris Teeter Supermarkets acquisition last year.

Harris Teeter's acquisition opens up an excellent opportunity for Kroger to access areas with high median incomes such as Northern Virginia and the North Carolina research triangle. Kroger has also jumped onto the organic and natural food bandwagon, aiming at consumers who are driven toward organic and natural food items for reasons of health and supporting local farmers.

Safeway's moves
Kroger isn't the only one to offer organic and natural food items. Safeway also offers organic and natural food items. It has its own private label brand -- O Organics -- that has more than 300 items . The company has also been going through restructuring and realignment, and it decided that it will be exiting the Chicago market where it operates 72 Dominick's stores.

This is a good move as losses from Chicago were offsetting the gains from $5.7 billion worth of asset sales in Canada last year . This will result in tax benefits which Safeway intends to use for investing in growth or share buybacks.

Whole Foods: Better than the others?
While both Kroger and Safeway have jumped on the organic bandwagon, if we look at the five year stock price appreciation then we find that Whole Foods is the clear leader with more than 700% appreciation as shown in the chart below.

WFM Chart

WFM data by YCharts

Despite facing completion from the likes of Kroger, Safeway, and other grocers that have started offering organic food items, Whole Foods is buoyant about future growth even after weak fourth-quarter results. This is because the market for organic food in the U.S. is expected to exceed $80 billion by 2015 as per Farm Exchange.

The demand for the company's items is so solid that it has revised its store target. Previously, the company had a vision of growing to a store count of 1,000 from its current figure of approximately 300. That target has now been revised upwards to 1,200 stores. This may sound like just a 20% upward revision, but it shows the confidence that company has as far as the growth of the market is concerned going forward.

Bottom line
All three companies have been focusing on organic food for their growth, but investors should take a closer look at Kroger and Whole Foods. Kroger's size and its presence across various markets should help the company keep up its strong revenue growth in the future. Also, the company's stock is cheaper than Safeway with a P/E ratio of 13. Whole Foods is expensive compared to Safeway, but the company is also operating in a fast growing space and has upped its store target. Both Kroger and Whole Foods could be good buys.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Fool contributor Prabhat Sandheliya 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.

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