OK, so maybe that title isn't entirely true. After all, if I were managing supermarket chain Kroger (NYSE:KR), I'd probably still be on edge about the possibility of getting Wal-Marted (NYSE:WMT) out of profitability. But even so, Kroger is doing a pretty good job playing the hand it currently holds.
For the second quarter, revenue climbed by nearly 7% as identical-store sales rose by 5.1% including fuel and 3.4% excluding fuel. Although fuel is still hurting overall gross margins, the company continues to make progress with its operating structure, and the operating margin actually improved slightly. As a result, operating income managed to grow by about 14%, and net income grew by 38% for the quarter.
Good management extends down to the cash flow statement as well. Although operating cash flow is basically flat with the first two quarters of last year, lower capital expenditures led to 20% free cash flow growth. It's not as though Kroger is skimping -- rather, the company is looking to make smaller (and cheaper) store enhancements and improvements, instead of large-scale investments.
Continuing a stated policy of using one-third of available cash flow for debt reduction and the remainder for shareholders, Kroger trimmed close to half a billion dollars of debt. It spent another $38 million on repurchasing shares during the quarter.
At least in my region, though, it looks as though Kroger is working to hard to attract the higher-end shoppers while not pricing itself out of the core "normal" shopper market. The stores look nicer and seem to carry a wider range of products than I recall from a few years back. Given the ever-present competition, that's likely a smart idea for Kroger. After all, it's only a 15-minute drive to rivals like Food Lion (owned by Delhaize Group (NYSE:DEG)), WholeFoods (NASDAQ:WFMI), Wal-Mart, Target (NYSE:TGT), and Harris Teeter (owned by Ruddick (NYSE:RDK)). When you have to face competition like that, everything you can do to stand out without alienating customers is important.
Although I shop at Kroger, I don't own the stock. Yes, Kroger is a good supermarket and a pretty respectable generator of free cash, but I'm just not that interested in a super-competitive industry with razor-thin margins.
For more Takes from our supermarket of investment ideas:
- Albertsons Marked Down
- Albertsons on the Auction Block?
- Turnaround at Wild Oats?
- Kroger Crows About Its Quarter
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
