It has been a great year for grocery chain Kroger(KR +0.62%). Kroger owns the Ralphs, Smith's, and Food-4-Less grocery chains, as well as its namesake Kroger stores, and it is the largest supermarket operator in the United States. Shares of Kroger are up a whopping 48% in the past year, a much stronger performance than the approximately 4% gain registered by the S&P 500 over the same period.
These gains are even more impressive considering the tough climate for grocery operators. The supermarket industry is intensely competitive, but Kroger keeps on thriving. The company recently announced a three-fold plan to reward its shareholders.
A trio of rewards
First, the company will split its stock 2-for-1, its fifth stock split since 1979. Separately, Kroger will increase its dividend by 13.5%, taking its annualized payout to $0.84 per share. The new dividend amounts to a 1.1% yield. Also, the company will add an extra $500 million to its stock repurchase program, beginning the buybacks after its current fiscal year ends in January 2016.
Of course, a stock split does not actually create value for shareholders. The split just increases the number of shares outstanding and simultaneously reduces the price of each share by the same proportion. Still, splits do appear to have a positive effect on stocks, if only for psychological reasons. Some investors seem to prefer buying stocks at lower prices. And more importantly, the Kroger stock split will allow employees and individual investors greater access to investing in the company.
Here is how Kroger is able to send so much more cash back to its investors.
Improving fundamental performance
The Kroger business has improved measurably in recent quarters. There are two primary drivers of the recent strong growth: lower costs and a unique ability to connect with customers.
On the cost side, total operating expenses as a percentage of sales fell 15 basis points year-over-year last quarter. A major driver for the cost reduction could be the declining price of milk. U.S. raw milk prices fell 32% on average from February to April due to lower demand from China as well as the Russian ban on U.S. milk and dairy imports. Kroger stated in its conference call last quarter that as milk prices come down, consumers tend to buy more of virtually everything else. That is because milk is one of its most price-elastic items. Milk is a surprising catalyst for sales of many other perishable items, which account for roughly 22% of total revenue.
Even more impressive, same-store sales, which measures sales at locations open at least one year, rose 5.7%, excluding fuel, beating the 4.4% growth anticipated by analysts. Kroger has had a long streak of success, with an industry-leading 46 consecutive quarters of same-store sales growth. Last quarter, the company also grew earnings per share by 27% year-over-year.
Management is in touch with customers
Kroger is truly resonating with its customers. The company has implemented a number of initiatives that have fueled its success through its "Customer First" strategy. This includes low prices, high-quality product offerings, and top-tier service by making the customer its highest priority. Another strategy has been the rapid adoption of digital capabilities. Kroger has pushed hard to increase its technology and digital offerings to customers.
That includes ClickList, its online ordering and customer pick-up service. More than 2 billion digital coupons have been downloaded from Kroger's digital properties since it began offering digital coupons in 2009. It took four years to reach the first billion but only 15 months to reach the second billion, which implies the concept is rapidly gaining traction with customers.
Kroger has racked up strong growth for many quarters in a row thanks to its effective management strategies. Now it is sharing its success with shareholders through a higher dividend, increased stock buybacks, and a stock split.
