Kroger's Strategy Makes It a Rewarding Pick

The customer is definitely king -- and the key to a successful business, as reflected by Kroger's (NYSE: KR  ) rocking performance with each passing quarter. The company's focus on customers' needs is a recipe for growth. The largest U.S. supermarket chain once again proved the value of its strategy when it posted its fourth-quarter results recently. These numbers beat analysts' expectations.

A peek into the quarter
On a reported basis, quarterly revenue dropped 3.7% from the year-ago quarter, hitting $23.22 billion. The decline in sales was attributed to 2013's extra week. Therefore, on a comparable basis, the top line actually surged 4.8% from the previous year. Adjusted earnings increased to $0.78 per share from $0.71 per share a year ago.

Revenue was driven by higher sales during the holiday season, especially as shoppers flocked into Kroger stores to ensure they had all the necessities before winter storms hit. According to Kroger, it ensured that it had ample inventories in order to meet growing demand.

Moreover, Kroger has made many efforts to improve customers' overall experience at its stores. The Cincinnati-based retailer's focus on store format and the time taken at checkout improved customer experience at its stores. Therefore, people visited its stores more often. It has also been developing smaller-format stores in order to keep a check on costs. Although these efforts were made quite some time ago, they have started bearing fruit, leading to same-store sales growth of 4.3% during the quarter.

Kroger is expanding its presence in the organic food market by adding more products made with organic ingredients. Since people are becoming more health-conscious, organic products have become quite popular, as shown by the growth of retailers such as Whole Foods Market (NASDAQ: WFM  ) . While Whole Foods mainly caters to more affluent customers who are willing to pay a premium for natural products, Kroger provides its goods at a comparatively lower price for middle-class customers. Like many retailers, Kroger offers discounts to shoppers who join its loyalty program.

In fact, Whole Foods has also suffered due to its pricing strategy as people shifted to players such as Kroger that offer organic products at comparatively lower prices. Its latest quarterly numbers failed to meet the Street's expectations as not only increased competition but also colder weather kept consumers away. Revenue stood at $4.24 billion, while analysts expected $4.29 billion. Earnings came in at $0.42 per share, against the estimate of $0.44 per share. The company has resorted to providing discounts, which are expected to attract more customers.

Acquisition as a great method of growth
When compared to other grocers such as Safeway (NYSE: SWY  ) , Kroger has also performed better. Safeway also reported its quarterly numbers recently that failed to meet the Street's estimates. Revenue was almost flat at $11.3 billion and same-store sales grew 1.6%. The increase in comparable-store sales was mainly due to higher product pricing, while actual volumes were flat. The retailer is having a tough time in attracting more customers to its stores, as is evident from flat volumes. It had to recall some products and to exit certain markets such as Canada and Chicago.

Kroger, on the other hand, has been strengthening its position and making acquisitions. It acquired Harris Teeter Supermarkets in January in order to expand its presence in the upscale market and the southeastern U.S. Harris Teeter also offers gluten-free products. Hence, it will enhance Kroger's presence in this segment. Harris Teeter also has a great online service network that Kroger will now benefit from. This service, called Express Lane, lets customers place their order online and collect their items from any of the nearby stores, without getting out of the car.

Kroger aims to combine its purchasing and other functions with that of Harris Teeter. This should save between $40 million and $50 million every year.

What next?
Kroger has announced plans to spend $3 billion on capital projects in the current year. That would cover introducing new products and opening new locations, including the expansion of Harris Teeter's 200-store network.

Kroger provided a bright outlook for fiscal 2014. It estimated earnings for the year to be in the range of $3.14 to $3.25 per share, while analysts had projected $3.13. Kroger's same-store sales growth estimate is between 2.5% and 3.5%.

Final verdict
The grocery chain remains intent on attracting consumers' attention via strategies for making customers happy. The loyalty reward program, store layout, reduced queue times at checkout lanes, and organic food are all a part of this "customer first" plan. It is also expanding by acquisition and has a bright future. I believe this retailer is set to grow significantly in the years to come.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (1) | Recommend This Article (1)

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 April 18, 2014, at 9:27 AM, TMFPennyWise wrote:

    Pratik, Very good summary of Kroger's excellent execution in the grocery biz. (BTW I've been following your posts and appreciate all your updates on the consumer stocks.)

    FYI Here's yesterday's news about Kroger strategic expansion plans from the Cincinnati Enquirer: http://www.cincinnati.com/story/money/2014/04/16/kroger-bets...

    About pleasing the customer--I've been called three times in the past few months and asked to take a survey about my Kroger shopping experience. This may have been because I complained a little bit about some customer service at my Kroger Marketplace store (which is usually spot on with their customer service). Anyway, I think it's interesting that they are going to such lengths to achieve their customer service goals.

    In the phone call surveys they were especially interested in what sort of buying I do at Whole Foods and how shopping there compared with my Kroger.

    I'm in the middle of doing a 'price check' between the two stores and I'll be interested to see the results. I've noticed my Whole Foods has posted a lot of signs around the store about special deals on staple items...

    I sold my Kroger stock to buy Whole Foods on a MF recommendation--I may have made a misstep there...only time will tell.

    Cheers!

    J.

    TXRH Ticker Guide

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2918241, ~/Articles/ArticleHandler.aspx, 11/26/2014 5:28:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement