Kroger Profits, Naturally

In the supermarket of investing ideas, finding a company that can consistently be a low-cost provider and adapt to marketplace changes can make for a profitable investment. In the market of supermarkets, Kroger (NYSE:KR) is surely becoming that investment.

Although it is the largest supermarket chain, it also runs a seemingly incongruous chain of 428 fine-jewelry stores under the names Fred Meyer, Littman, and Barclay. Littman and Barclay, which Fred Meyer acquired in 1998, came under Kroger's aegis the following year. Rounding out its operations are also a chain of convenience stores and several manufacturing facilities.

For yet another quarter, the supermarket with almost 2,500 stores turned in another analyst-beating performance. Earnings rang up at $0.30 per share, ahead of the $0.28 analysts had expected. And while revenues fell a bit short of those forecast, management showed this grocer to be quite green by raising the company's guidance for 2007. You can get the full receipt in this Fool by Numbers article.

Kroger CEO David Dillon admirably gave the credit to his employees for the company's performance, but the drivers that seem to be making the cash registers ring are in the area of organic foods and price. That's put Kroger in a nice aisle of its own, because on one side, it has premium-organic-foods supplier Whole Foods (NASDAQ:WFMI) and Wild Oats (NASDAQ:OATS), and on the other, it has discounter markers such as Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST). Positioning itself between them, Kroger has found a niche that can be profitable when one also throws improved customer service into the cart.

That allows Kroger to raise its earnings guidance for the rest of this fiscal year to 8% to 10% and in the area of 6% to 8% in 2007, while also shooting for the high end of that range, even after accounting for the extra week available in 2006. Whole Foods, on the other hand, had to mark down same-store-sales numbers to the 6% to 8% range for 2007, down from 11% in 2006. Wild Oats is having to close a number of underperforming stores, and Wal-Mart had a tough November, with comps declining 0.1% at a time when most retailers were basking in the beginning of the holiday shopping season.

Yet as strong as Kroger has been performing, it's also been priced for it and is trading near its 52-week highs. It's valued more cheaply than Safeway (NYSE:SWY), perhaps, but it's still at a premium. A few months ago, I had hoped to be able to buy Kroger at a discount, and while the stock had slipped a little from its price back then, it never came close to my preferred mid- to high-teens price, where it would seem an attractive buy. For current holders of the stock, you own a top-shelf company at a fair price. Others like me will have to wait for some market irrationality before we join in.

Check out these related Foolish articles:

• Here We Go a-Krogering: Fool by Numbers
• Brown Is Back in the Bag
• Is Kroger a Top-Shelf Grocer?
• Foolish Forecast: Kroger's Not Croaking

Whole Foods and Costco are recommendations of Motley Fool Stock Advisor . Wal-Mart is a recommendation of Motley Fool Inside Value . Whatever your investing style, The Motley Fool has a newsletter for you.

Fool contributor Rich Duprey owns shares of Wal-Mart but of no other company mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.