Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Why Kroger Stock Is a Buy

By Demitri Kalogeropoulos - Jan 23, 2021 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The case for one of the cheapest national retailing chains on the market.

Investors aren't sure what to make of Kroger's (KR 1.38%) business right now. Yes, the chain enjoyed record growth in 2020 as the pandemic lifted demand for essentials like groceries and home cleaning supplies. But the supermarket giant was losing market share to rivals like Walmart (WMT 0.11%) before COVID-19 struck, and it might return to that disappointing trend as the virus threat recedes.

Still, there are some good reasons to believe Kroger is on a fundamentally stronger path today, one that will generate solid returns for shareholders. Let's look at a few factors that point to a brighter future for the business in 2021 and beyond.

An employee restocks produce.

Image source: Getty Images.

1. Engaged shoppers

The recipe for retailing success today has two main elements, both of which are best illustrated by Target's (TGT 1.26%) runaway growth in 2020. Shoppers are looking for a great shopping experience that combines online conveniences with the speed of in-store pickup. They also want access to a wide selection of high-quality, exclusive merchandise.

Kroger's success in these areas is reflected in its market share wins against Walmart in recent quarters, with sales up 11% through early November. The chain credits its e-commerce platform, plus popular in-store brands like Simple Truth, for delivering that improved growth. Kroger is on pace to boost comparable-store sales by around 14% in fiscal 2020, compared to management's initial target of less than 3%. High customer satisfaction suggests it has a good shot at keeping many of those new households once stay-at-home trends settle back down to normal over the next few quarters.

2. Rising margins

Kroger isn't nearly as profitable as Target, but the grocer's latest results suggest it could be approaching the kind of earnings surge that has supported that stock's rally. Operating profit is up to $2.9 billion, or 2.9% of sales through the first three quarters of 2020 compared to $1.7 billion, or 1.8%, a year earlier.

KR Operating Margin (TTM) Chart

KR Operating Margin (TTM) data by YCharts

Kroger should notch more gains here over the next few quarters as it boosts efficiency in the e-commerce niche. Walmart and Target have both walked that path, with help from rising prices and reduced promotions for ultra-fast fulfillment options like same-day delivery. There's every reason to expect Kroger to benefit from the same moves in 2021, assuming consumer spending trends stay strong.

3. Gushing cash returns

Kroger has been accumulating cash through the pandemic even as earnings are set to rise over 50% this fiscal year. Management's main use for these resources is to reinvest in the business through initiatives like store remodels and improvements to the online selling platform. Yet, even after meeting these needs there's cash to spare right now, with debt recently plunging to below two times adjusted earnings last quarter.

That positive trend supported Kroger's 13% dividend increase in 2020, and investors can expect to receive more cash through dividends and stock repurchases that will supplement their investment returns this year. It's also good news for the business that CEO Rodney McMullen and his team are free to pursue potentially game-changing acquisitions like their buyout of Harris Teeter back in 2013.

Altogether, these factors have set the stage for impressive operating results after Kroger deals with the immediate slowdown from 2020's COVID-19 spike. And, while the supermarket chain isn't currently enjoying the profitability surge that Target has seen, or the level of growth that Costco (COST -1.54%) is posting, these gaps are reflected in a far more modestly valued stock.

KR PS Ratio Chart

KR PS Ratio data by YCharts

Kroger is selling for just 0.2 times sales today compared to over 0.7 times for many of its peers. With such a low valuation, the consumer staples giant would only need to outperform by a slight margin to generate healthy long-term returns for shareholders. Investors shouldn't pass on that attractive balance between risk and potential reward.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.66 (1.38%) $0.66
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$119.20 (0.11%) $0.13
Target Corporation Stock Quote
Target Corporation
TGT
$155.36 (1.26%) $1.93
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$416.43 (-1.54%) $-6.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.