One of the great mysteries of the bull market is the fall of Kroger Co (NYSE:KR) and KR stock.
At the start of 2016, this was a $40-per-share stock. Now, it hovers near $20 per share. Its market cap is less than $18 billion, while its sales last year were $115 billion.
Yet, Kroger is the country’s second-largest grocery company, growing sales a few percentage points each year. It continues to out-earn its dividend, now 13 cents per share and a 2.5% yield. Debt levels remain stable at one-third of assets.
What has happened to Kroger, as with so many other retailers, is that its middle-class message has gone out of fashion. Investors either want low-end names like Dollar General Corp. (NYSE:DG), now worth more than Kroger despite being one-fifth its size, or they want high-end names like Costco Wholesale Corp. (NASDAQ:COST), now worth over three times more despite being roughly the same size.
KR Stock: The Amazon Threat
The main reason for this is fear of Amazon.com, Inc. (NASDAQ:AMZN), which has sent all retailers off a cliff. There is an assumption that Amazon is going to swallow everything and everyone in retail, that in a few years no one is going to leave their house anymore. When people ask if Kroger can survive, this is what they’re talking about.
Sometimes, in justifying Kroger’s fall, this AMZN phobia is combined with a fear of Wal-Mart Stores Inc. (NYSE:WMT), which has twice Kroger’s share of the grocery market and is now the second-largest online merchant.
But Kroger isn’t collapsing… yet.
The stock did fall hard after it reported a single down quarter, with net income of $303 million (33 cents per share) on revenue of $36.385 billion in the spring period. Its second quarter, ending in August, was in-line with the previous year, with earnings of $353 million, down only slightly from the $380 million of the previous year.
What Can Kroger Do?
There are simple things Kroger can do to hike its stock price if it chooses to.
Right now, Kroger is Ralph’s in California, Fred Meyer in Oregon, Dillon’s in Kansas, Harris Teeter in North Carolina and Roundy’s in Wisconsin. A single brand, as Federated Department Stores chose with Macy’s Inc. (NYSE:M), would let it efficiently buy national ads. It could use a second name for upscale units like Mariano’s in Chicago, as Macy’s did with Bloomingdales.
It could do more than just experiment with delivery, as it has done with its King Sooper’s chain in Colorado, and meal kits, as it has done by buying Prep + Pared last month. It is also opening its own “comfort food” restaurant in Kentucky. It’s trying things, it’s just not committing to anything.
Currently, Kroger stock is failing the three tests Matt McCall of MoneyWire looks for in a long-term buy. Its fundamentals seem weak, the stock’s technicals are poor and it lacks the intangibles in that it’s reacting to market trends rather than driving them.
But all these things can be fixed. Kroger already has most of the Wal-Mart strategy in place. It already has, in some of its smaller units, the kind of cachet that attracted Whole Foods to Amazon. It already does meal kits and delivery.
The problem is no one knows this. Customers don’t know it. Investors don’t know it.
Kroger CEO William McMullen made his career in finance. The company needs to push merchandisers and marketers to the top of its executive ranks.
The Bottom Line on KR Stock
Right now, Kroger is drifting. But there are easy solutions to the stock’s problems, and the company itself is not in nearly as much trouble as the stock price suggests.
Kroger is just begging for a hedge fund to make a move on it and demand change. Once one arrives, the stock is likely to take off.
in the meantime, you can pluck it from the bargain bin for a dividend that is well-backed by earnings.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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