Unfair as it may seem, sometimes you can find a company that stands out from others in its industry, but it still isn't all that interesting as a stock idea. Such would seem to be the case with Kroger (NYSE:KR). While this is a well-run chain of supermarkets, it plays in a business arena that's not the most appealing around.
Third-quarter results were solid. Sales were up a bit more than 9%, with identical-store sales up about 3.7% (excluding fuel sales). Although the gross margin slipped slightly, operating improvements led to a rise in operating income of better than 23% and a nice little year-on-year jump in operating margin. Cash flow continued to improve on a year-to-date basis, despite flat cash flow from operations, as lower capital expenditures led to increased free cash flow.
Nevertheless, we're still talking about a company with perilously thin margins in an industry that generally produces returns on invested capital in the low single digits. As if that weren't enough, you have larger national players, such as Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), getting into the game in a big way. And there are the hassles and risks of dealing with unions in many areas.
Perhaps making the picture cloudier still is the ultimate outcome of rival Albertsons (NYSE:ABS) attempt to sell itself. Could Kroger buy Albertsons? Yes. Will Kroger? I don't think so, or at least not in total. I could see Kroger possibly being interested in some parts and pieces of Albertsons, but I'd be surprised to see the company go for the whole enchilada.
Kroger has done pretty well for investors already, posting a return of better than 26% over the past year. Looking ahead, though, I can't help feeling that there are more interesting ideas out there. That's no slight on what I believe is a well-run company. Rather, I invest with the expectation of making outsized returns, and I just don't see Kroger as a top-notch candidate to do that again over the next year.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
