Summary
- Kroger is a grocery giant with an efficient scale and has a leading share in its core markets.
- KR stock is demonstrating solid growth amidst economic uncertainty while offering consumers a compelling value proposition.
- I also highlight the dividend, balance sheet, valuation, and other important points.
Just ask any retailer, and they will tell you that their business is a tough nut to crack. Among the challenges include thin margins and the need to effectively scale to edge out competitors.
However, those who do break through tend to reap the rewards, as in the case of Walmart ( WMT ) and Target ( TGT ), despite some recent hiccups.
This brings me to the grocery retail juggernaut, Kroger ( KR ), which has carved out strong competitive advantages for itself over not just years, but decades.
Kroger's price remains cheap compared to where it traded last year, sitting far below its 52-week high of $62.78, as shown below. In this article, I explore what makes KR an attractive stock for total return-focused investors.
Why KR?
Kroger has been around for over 130 years and today is one of the largest grocery retailers in the U.S., operating nearly 2,800 supermarkets spread across 35 states, operating under 28 different names. It has a strong reputation for offering quality products at competitive prices, and over the trailing 12 months, generated $146 billion in total revenue.
One of the biggest strengths of Kroger is its size and scale. This gives it a significant presence in the grocery retail industry and allows Kroger to negotiate better prices with suppliers, which helps the company maintain its competitive edge. This advantage was noted by Morningstar in its recent analyst report :
Locally, Kroger held a number-one or number-two market share in about 90% of the major markets [in which it operates]. We believe this scale is vital, as it allows a grocer to leverage distribution and advertising costs in a way that smaller competitors cannot.
Kroger can use its transaction volume within a local area to keep trucks full and distribution centers operating at nearly full capacity. Subscale participants, including online sellers, are forced to incur similar costs, particularly since many products are perishable, without the turnover needed to maximize operating profits.
Meanwhile, KR just reported strong sales growth of 6.2% excluding fuel, during the fourth quarter, sitting 100 bps ahead of the 5.2% consensus estimate. This was driven by robust identical sales growth of 10%, and digital sales, whose growth slightly accelerated to 12%. This caps off a strong 2022 for Kroger, during which it exceeded $1 billion in cost savings for the fifth consecutive year. This enabled KR to achieve faster adjusted EPS growth of 15% compared to the prior year.
Moreover, Kroger offers a compelling value proposition to consumers in an inflationary environment and with the household savings rate sitting at a low 2% , even by pre-pandemic standards.
This is demonstrated by management's research that shows cooking at home is 3 to 4x less expensive than dining out, which makes sense when factoring in the high cost of restaurant labor. Not only that, Kroger is appealing to high-income households as well, as management estimates this segment grew by 1.1 million households in 2022.
Looking forward, KR plans to further its scale and efficiencies with its Albertsons ( ACI ) acquisition, with management expecting to achieve total shareholder returns above its stand-alone model during the first 4 years post close.
Importantly, KR maintains a strong BBB rated balance sheet with a net debt to EBITDA ratio of 1.57x, comparing favorably to 1.63 from a year ago, and sitting well below its targeted range of 2.3 to 2.5x, giving it capacity to fund its ACI merger.
Moreover, while KR's 2.3% dividend yield isn't anything to write home about, it does come with a low 23% payout ratio, a high 15% 5-year CAGR, and 16 consecutive years of dividend growth.
KR should also be thought of as being a total return stock, as management has also focused on share buybacks as a tax efficient form of capital return. As shown below, KR has retired 17% of its outstanding float over the past 5 years alone.
Lastly, I see value in KR at the current price of $45.73 with a forward PE of 11.0, sitting well below its normal PE of 13.8 over the past decade. This means that KR would get a 9% earnings yield from simply buying back its own shares. Analysts have a consensus Buy rating on the stock with an average price target of $52.21 , equating to a potential 16% total return over the next 12 months.
Investor Takeaway
Kroger is one of the largest and most successful grocery operators in the US, leveraging its scale to compete with online sellers at lower costs. It's demonstrating strong operating fundamentals, especially in the current inflationary environment.
Lastly, Kroger has a robust track record of shareholder returns through dividends and share buybacks, which are highly accretive at today's low valuation. As such, total returns-focused investors may want to consider layering into the stock at present levels.
For further details see:
Kroger: Help Yourself To This Undervalued Stock