Why Kroger Offers a Wide Margin of Safety for Investors
- By Sangara Narayanan
Of the top five retailers in the United States, Kroger (KR) is the cheapest, trading at a mere 0.26 times its sales. Despite having annual revenues in excess of $100 billion and posting positive same store sales for so many years, the market has punished the retailer due to difficult market conditions and expectations that sales might suffer due to deflationary pressure sooner rather than later.
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The intrinsic value of KR
Kroger, Costco (COST) and Target (TGT) have been going through tremendous margin pressure, mainly due to food prices and fuel deflation, which has been going on longer than most of us expected. Wal-Mart (WMT) and Amazon (AMZN) have come out at the opposite end, posting stronger than expected sales. As food prices keep inching lower, Wal-Mart - due its size and scale, not to forget its motto to get us the lowest prices possible - has somehow managed to benefit from it, while elsewhere their push into neighborhood stores has also helped expand sales numbers.
Amazon, as usual, has continued to grow its users within the United States as well as in international markets. Kroger, the master inorganic growth retailer, saw its stock price decline by more than 28% since the start of the year, and looking at the chart and market conditions, recovery does seem to be out of sight.
It is a huge disappointment because Kroger is one of the very few retailers of scale to boast of 50 consecutive quarters of positive non-fuel identical same store sales. It is a major achievement considering the period in which the growth happened. While e-commerce growth and Amazon were taking customers away from brick and mortar stores, Kroger kept posting positive sales numbers quarter after quarter.
One can argue that most of the top line growth actually came through acquisitions, but it's not an easy task to keep adding different companies in different locations and still end up having positive same store sales for so many years. This company has mastered the art of buying regional players and making them work.
At the end of second quarter of the current fiscal, Kroger had 2,781 stores, of which 2,386 were combination stores. The supermarket count has moved from 2,631 to 2,781 in two years, thanks to the company's 'habitual acquisition' philosophy. Kroger obviously has plenty of room to add more stores to its count. They have honed the craft over many years and perfected the science of buying regional players, allowing them to run on their own branding power.
The company will indeed improve its top line through this approach, and let's not forget the near 800 convenience stores (C-Stores) Kroger has, which play a big future role in improving the company's reach to its customers. That number has been static for the last few years, but with Kroger getting busy with its online operations, the company will most likely be following Wal-Mart's lead in exploiting different types of store formats to its advantage.
Food price inflation is not something that will go away soon. Grocers, retailers and fuel sellers are all under margin pressure. Kroger's identical store sales have been coming down and might even turn negative if the deflation worsens, but that doesn't mean that the company's future is questionable. Kroger has a solid footprint across the country and its multi-brand, multi-store concept does make it stand out from the competition. At the current price point, there is a wide margin of safety available for investors
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Sign with MRK. Click here to check it out.
The intrinsic value of KR
