Kroger (NYSE:KR) can't catch a break.

The grocery store conglomerate's stock has been in slow decline since 2016, and the company's 2019 first quarter report in late June did little to reverse the trend. The food distribution business is a tough one, especially with the level of competition out there. Making a digital transformation is no small task in today's world. Competitor Amazon is still going gangbusters, and competitors like Walmart and Target have developed into e-commerce powerhouses in their own rights.

Kroger is making progress, but it's modest at best. There are headwinds, but now could be the right time to follow the grocery chain's performance a bit closer.

An underwhelming quarter

There were some decent numbers to highlight during the first quarter. When excluding effects from the sale of its convenience stores in 2018, revenues were up 2%. Gross profit margin on product sold was also stable, indicating that Kroger's digital sales, store pickup, and delivery businesses aren't eating into the bottom line too much. On that front, digital business increased 42% during the quarter, leading to a 1.5% increase in existing-store sales (a combination of foot traffic and average customer ticket size).

Metric

Q1 2019

Q1 2018

Increase (Decrease)

Revenue (unadjusted)

$37.25 billion

$37.72 billion

(1%)

Gross profit margin

22.2%

22%

0.2 pp

Operating expenses

$6.31 billion

$6.26 billion

1%

Adjusted earnings per share

$0.72

$0.73

(1%)

Pp = percentage points. Data source: Kroger.

The problem, though, is that many of those new digital sales are just replacing in-store sales. Plus, the profit margin on groceries is slim, and Kroger's advance in digital business is not yielding much in the way of growth on either the top or bottom line. The company did point out its alternative revenue streams -- which include media and advertising, customer data, and a private equity investment division -- are on track to add an additional $100 million in operating profit this year. That's significant given the lack of advance pretty much everywhere else, but it won't go very far in the grand scheme of things.

Someone holding a smartphone and pushing a red "order" button.

Image source: Getty Images.

Too cheap to ignore?

There is some silver lining here. Kroger did announce a 14% increase to its dividend after the first quarter. Paired with the double-digit share price drop, that's good for a 3%-a-year yield as of this writing. It isn't the best retail stock payout around, but it is better than average.

Kroger stock also appears to be approaching value territory. Trailing 12-month price to earnings is at a meager 9.5. Granted, using the more accurate price to free cash flow metric (money left over after basic operating expenses and capital expenditures, which excludes noncash items), the stock is a pricier 18.3. The stock therefore isn't cheap, but it could be cheap enough to warrant watching.

I'll stop short of saying Kroger is a buy at these levels. As long as profitability remains stagnant, it could be enough to send some investors packing and looking for greener pastures, which in turn could keep downward pressure on share prices.

However, if the stock continues to tumble, the dividend yield will rise further. And there is strong progress being made on the digital front, which could eventually begin to produce results. That could make this grocery store giant worth a look in the near future.