After The Kroger Co.'s (KR -0.75%) 18% stock advance since its October low, buying a new stake might seem a bit intimidating. Making the matter even more daunting is the fact that at its current price near $46 per share, this grocer's stock has met analysts' consensus price target of $45.79. There just doesn't seem to be any more upside left to reap.
Yet, there's good reason to expect big things from Kroger in 2022 -- things that weren't in place in 2021. Here are three key growth drivers that make the stock an unexpectedly solid buy as we move into the new year.
1. Expanded stock buyback
At least some of the recent rally can be chalked up to the company's unveiling of a new, vastly expanded stock buyback program. Kroger announced near the end of December that its board of directors had authorized $1 billion in stock repurchases, replacing the previous repurchase authorization, which only had $157 million left in its budget.
It's kind of a big deal. Kroger is currently a $34 billion outfit. Assuming everything remains as is, taking $1 billion worth of shares out of circulation makes the remaining shares worth about 3% more than they would have been without the buybacks.
2. Rapidly growing ad business
It may not be readily apparent to those using the platform on a regular basis, but the banner ads that appear to online grocery shoppers at Kroger.com are revenue-generating, paid for by brands looking to steer consumers toward their products. They leverage the depth of digital data Kroger has collected about its customers over the course of several years. Advertisers can also work with the consumer goods retailer on cooperative advertising campaigns.
Image source: Getty Images.
We don't know exactly how big this business is yet. The company only noted within its third-quarter report that its so-called alternative profit business -- mostly advertising -- remains on pace to generate operating income near $150 million for fiscal 2021. That's a pretty respectable piece of the $2.5 billion in operating profits produced by Kroger through the first three quarters of last year. And it's driven by a website that the grocery chain was going to operate anyway.
Regardless of where Kroger's advertising operation is right now, it's probably only scratched the surface. Market research outfit eMarketer estimates that spending on U.S. retailers' own media and advertising platforms will grow another 31% this year and 26% next year en route to $52 billion worth of ad spending in 2023. Even winning a modest fraction of that growth could beef up Kroger's bottom line by quite a bit.
And remember, a well-oiled advertising business not only introduces another profit stream into Kroger's cash flow, but it also drives online sales.
3. A growing fulfillment and delivery network
Finally, Kroger has been expanding its logistics capabilities in a huge way since the middle of last year -- something that could be easy to miss amid all the noisy, pandemic-related news that's occupied investors of late. In October it announced the addition of two new fulfillment centers in California, and in December added a delivery "spoke" in Indiana just a few days after beginning operations at a new fulfillment center in North Carolina. The developments cap off a year-long series of similar expansions, most of which are meant to introduce automation and efficiency to support stores and at-home deliveries.
It's not easy to determine exactly what sort of top- and bottom-line impacts these efforts will have. Yet, it's only reasonable to assume these investments will allow Kroger to be more responsive to consumers shopping for food. Even without the specifics, investors have every reason to believe that a bigger and deeper-pocketed Kroger will be able to use these logistics enhancements to stay ahead of prospective competitors.
Time to go grocery shopping
Maintaining its market-leading share among dedicated grocery store chains, of course, is nothing new for Kroger. The company has successfully leveraged its size for years now, ensuring its long-term cadence of sales and earnings. Looking forward, the analyst community recognizes that the pandemic-prompted sales and earnings surge merely lifted the baseline from which Kroger will continue growing its top and bottom lines.
Data source: Kroger Co. Chart by author.
To this end, despite the stock's recent run-up, it's hardly too far gone for long-termers to consider here. Kroger shares are only priced at around 13 times this year's projected earnings, and that outlook might still underestimate just how much is happening right now, which will bolster earnings in 2022 and beyond.
