Fresh Kroger on Sale!

After a reduction in share price following earnings, is it possible that now might be a prime time to jump into Kroger? Or should the Foolish investor consider a stake in Costco or Target instead?

Mar 16, 2014 at 10:15AM

Picture

Source: Kroger

After the retailer reported earnings for the fourth quarter of its 2013 fiscal year, shares of Kroger (NYSE:KR) declined almost 1% to close at $43.37. Had Kroger's results been worse-than-expected, a share price decline would most likely have been warranted. However, this was not the case with Kroger which actually beat on both the top and bottom lines. Given this reaction by Mr. Market to a strong quarter, should Foolish investors consider acquiring a piece of the retailer or is there trouble brewing on the horizon?

Kroger's earnings were hot!
For the quarter, Kroger reported that revenue came in at $23.2 billion. Although this represents a 4% drop from the fourth quarter of last year, the company's revenue actually rose 5% when you consider that last year's data contained an extra week of operations. To make things even sweeter, the company's revenue came in slightly above the $23.1 billion that analysts expected.

In terms of profitability, Kroger didn't let its shareholders down. For the quarter, the company reported earnings per share of $0.78 (adjusted for a LIFO charge and its extra week of sales). This was 10% more than the $0.71 the company reported in the year-ago quarter and it was above the $0.72 forecast by analysts.

Can Kroger hold a candle to Target and Costco?
During the year, Kroger reported that revenue rose 2% from $96.6 billion to $98.4 billion, while its net income rose only 1.5% (10% after all adjustments were made) from $1.5 billion to $1.52 billion. The disparity between the company's rise in revenue and its rise in profitability came from a modest increase in its selling, general, and administrative expenses in relation to sales.

At first glance, this performance doesn't look all that impressive. However, when you compare this performance to that of Target (NYSE:TGT), the picture starts to look a bit better. For the year, Target saw its revenue fall 1% from $73.3 billion to $72.6 billion, while its net income plummeted 34% from $3 billion to $2 billion.

The reason for this drop in sales and profits stems from a hit the company took in the fourth quarter following the news that as many as 110 million customers may have had their credit card, debit card, or other information stolen by hackers. During that quarter alone, Target's revenue fell 5% while its net income declined a whopping 46%.

Another retailer that Kroger should be placed up against is Costco (NASDAQ:COST). Over the past year, the retailing giant that some investors dub the next Wal-Mart saw its revenue rise 6% from $99.1 billion to $105.2 billion. The primary driver behind this growth was a 6% rise in comparable-store sales, but the business also benefited from the openings of 26 new stores throughout the year.

At first glance Costco's performance was good, but it's not so much better than Kroger's that it, by itself, should dictate an investor's decision on which company to buy. However, when you add to this the fact that Costco's management was able to grow net income by 19% from $1.7 billion to $2 billion, the disparity between the two becomes more pronounced.  According to Costco's most recent annual report, the jump in profit occurred because of higher sales coupled with a reduction in costs in relation to sales.  

Between 2012 and 2013 alone, the company's cost of goods sold rose slightly less than its revenue with a growth rate of 5.9%.  This difference was due to a $48 million swing in LIFO accounting, coupled by lower costs in its optical and hearing operations.  

Another major contributor to the company's bottom line was a 1% reduction in its income tax provision, which stemmed from a $77 million income tax benefit.  While it is possible that its larger size could allow Costco to continue this bottom line improvement, the factors that contributed to its rise over the past year indicate that investors shouldn't hold their breath for it.

On top of the one-time expenses that helped to prop up Costco's bottom line over the past year was another driver of value that should be mentioned.  In 2013, approximately 2.2% of the business's revenue stemmed from membership fees.  By requiring shoppers to pay an annual fee for shopping at their stores, the company inflates its revenue but, more importantly, makes its bottom line more appealing since the costs associated with these fees are negligible.  

Unfortunately, management does not disclose the margins generated from these fees, but they do say that they were one of the two main drivers behind the company's $3.4 billion in cash flows from operating activities for the year.  This means that the fees, which are not assessed for Kroger's customer base, are aiding the company's profitability.  

Kr Vs Peers

Source: Kroger, Costco, and Target

Foolish takeaway
Based on the financial performance demonstrated by Kroger, it's clear that the business had a nice, respectable quarter but a so-so year. This is especially true when you consider that Costco grew quicker than Kroger and that it did so while generating a huge rise in profit for the year.

Moving forward, it's difficult to tell how Kroger will perform, but for the Foolish investor who is more interested in seeing attractive growth, Costco might make for an interesting prospect. On the other hand, for investors who would like a greater degree of diversification in their portfolios, the jewelry and convenience stores that Kroger owns might make for a more interesting play.

Could Kroger be the creme de la creme?
In spite of the modest gains the company posted for the year, is it possible that Kroger could be the best company to own for 2014? Or is there something better out there for the Foolish investor to consider?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers