It May Be Time to Put Kroger Co Stock in Your Investment Cart
For many years, the investment rule of thumb has been that grocers are fairly steady. True, the gains will not be huge, but the losses shouldn’t either.
But in the age of Amazon.com, Inc. (NASDAQ:AMZN), things have turned upside down. Even the U.S.’s largest grocer, Kroger Co (NYSE:KR), has not been immune. Just look at the stock chart. For the past year, Kroger stock has lost about 18%.
Several news events have led to the performance. Of course, there was Amazon’s acquisition of Whole Foods. Then there were several dicey earnings reports.
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Hey, consider the latest quarter. Full-year earnings dropped from $2 billion to $1.9 billion, and the company provided weak guidance, with profits of $1.95 to $2.15 per share. The Street was looking for $2.15 per share.
The Pros on KR Stock
I think Wall Street’s harsh reaction to Kroger stock is overdone. First of all, the impact of AMZN will probably be muted. Keep in mind that the companies serve different customers. Kroger is a low-price provider, whereas Whole Foods focuses on the premium items.
Actually, when it comes to the competition, Kroger stock is likely to feel the pressure from traditional brick-and-mortar operators like Walmart Inc (NYSE:WMT) and Target Corporation (NYSE:TGT), which have been bolstering their grocery businesses.
Next, Kroger is smart to reinvest the savings from tax reform to revamp its platform and pump more money into digital technologies. True, this will mean lower margins. But the benefits should have a positive long-term impact.
Consider that Kroger is already making progress with its efforts. The company has rolled out apps, which integrate with coupons, recipes and rewards. Then there are platforms like ClickList (a home-delivery service) and Harris Teeter ExpressLane (a pick-up service), which are in over 1,000 locations.
All these will allow Kroger to learn more about its customers, providing for more personalized experiences.
But the investments are not just about digital. Over the years, the company has been ramping up its healthier foods and private label offerings. Note that the Our Brands products involve over 15,000 private label items and generally have higher margins.
According to Kroger CEO Rodney McMullen, the changes he is making are about reinventing operations. In the latest earnings call, he noted:
“For our customers, we’ll make strategic investments to continue redefining the grocery customer experience through a combination of improved services, lower prices and added convenience. And for our associates, we are developing plans now to invest in long-term benefits, including education, wages and retirement.”
Now KR stock is certainly not without its risks. Keep in mind that food inflation remains a particularly thorny problem, and there is not much the company can do about it. Besides, the grocery business is mature, so growth will be tough to gin up.
Yet I also think that Kroger is not as vulnerable to disruption either. It seems like a stretch that millions and millions of consumers will change their habits and avoid going to grocery stores. For the most part, the physical locations provide convenience. Besides, habits generally take a long time to change.
Bottom Line on Kroger Stock
It’s important to note that Kroger stock is dirt cheap, with a price-to-earnings multiple at only 11.5. In other words, it seems like much of the bad news is already baked into the stock. There is also a decent dividend yield of 2.1%.
It will probably take time for the restructuring efforts to impact the bottom line. But for investors with a long-term approach, Kroger stock does look like an interesting value at current levels.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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