Kroger's Strategy Makes It a Rewarding Pick

Along with a great quarter, there are a number of reasons to buy the supermarket chain.

Apr 18, 2014 at 8:30AM

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.

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