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No Wonder Warren Buffett's Berkshire Hathaway Bought Shares of Kroger

By Daniel Sparks - Mar 6, 2020 at 6:22AM

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The grocer's latest results highlight its strong momentum, even as its shares trade at a conservative valuation.

Shares of Kroger (KR 1.71%) jumped on Thursday, rising 8%. Making this gain particularly impressive, the S&P 500 fell 3.4% on the same day. Investors apparently loved the company's fourth-quarter results and management's strong outlook for 2020.

Leading up to Kroger's fourth-quarter and full-year update on Thursday morning, the grocer was getting extra attention. The spotlight first turned to Kroger in early February, when an SEC filing revealed that Warren Buffett's Berkshire Hathaway (BRK.B 1.64%) (BRK.A 1.69%) had bought a stake in the company. Interest in the stock compounded amid growing coronavirus fears as many consumers have opted to stock up on staple products sold at grocery chains like Kroger's.

On Thursday, the grocer didn't disappoint. Strong results lived up to its conservative valuation, making Berkshire's recent purchase of Kroger stock at an estimated average price below $27 a great buy.

A man shopping in a grocery store

Image source: Getty Images.

Fourth-quarter results

In the consumer staples company's fourth quarter, sales rose 2.3% year over year when excluding fuel and the impact of business dispositions. Digital sales climbed 22%. Adjusted earnings per share were $0.57, up 18.8%.

These financial results were helped by a 2% year-over-year increase in same-store sales when excluding fuel sales, helping the company deliver full-year same-store sales growth of 2%.

Importantly, Kroger delivered on key 2019 targets, including full-year cost savings of more than $1 billion, alternative profit streams delivering more than $100 million of incremental operating profit, and same-store sales growth within its guidance range.

"We are pleased with our 2019 results and improving trends in our supermarket business," said Kroger CEO Rodney McMullen in the company's fourth-quarter earnings release.

Accelerating same-store sales growth

Perhaps the most notable takeaway from Kroger's recent performance is its accelerating same-store sales growth. Full-year same-store sales growth of 2%, when excluding fuel sales, was an acceleration from 1.8% growth in 2018. Indeed, this performance marked the company's second-straight year of accelerating same-store sales growth as the grocery chain executed on its "Restock Kroger" initiative to better position its business for sustained growth.

Looking to 2020, management forecast another acceleration in same-store sales growth. Specifically, management guided for the key metric to increase at a rate of 2.25% or greater.

Valuation matters

Kroger may still be growing slower than peer Walmart, which saw same-store sales growth of 2.8% in its most recent fiscal year. But Kroger trades at a more conservative valuation, even after its recent run-up, than the juggernaut supermarket. The stock's price-to-earnings ratio is 17. This compares to 22 for Walmart.

Kroger's continued trend of accelerating same-store sales growth, combined with its conservative valuation, reinforces why Berkshire Hathaway may have taken an interest in the grocer.

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Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
$48.14 (1.71%) $0.81
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$415,850.00 (1.69%) $6,900.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$277.50 (1.64%) $4.48
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05

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