Kroger; an attractive long-term investment

I had never heard of Kroger until it appeared as a top pick on my equity screening model results. Probably the main reason is that The Kroger Company operates mainly on the west coast and southern states of the United States and is therefore not as visible to Europeans.

Kroger is headquartered in Cincinnati and is the second largest supermarket chain in the United States. Kroger is also the fifth largest retailer in the world; their primary business being food stores which accounts for approximately 93% of total company sales. The Company employs one of the largest networks of private label manufacturing in the US, which creates approximately 40% of Kroger’s private label products across 37 manufacturing plants. Kroger also operates in-store pharmacies, medical clinics, and supermarket fuel centres.

Key Investment Arguments

Kroger consistently meets or exceeds earnings estimates, and as part of its investor relations policy the Company plans to improve debt coverage ratios, repurchase shares and increase dividend payments.

One of Kroger’s key strengths that set it apart from its competitors is the wide variety of store formats. The Company’s philosophy is to operate several formats of stores within the same market. Kroger has deviated away from the one box fits all model and instead designs stores that are dependent on the location and the individual needs of the community.

Kroger invests substantially in market research to deliver store formats which target different ethnic groups, income levels, and purchasing patterns. Whilst costly to the Company, it enables Kroger to expand and increase market share effectively and efficiently, as shown with the successful Harris Teeter merger which expanded the group’s footprint in Eastern US.

Kroger’s dominant market position is built on its vision of building lifetime loyal customer relations, through its differentiated high quality corporate brands which are often priced cheaper than leading brands. Its own branded products are intended to become the primary reason consumers pass competitors to shop at Kroger.

Growing market share is a long term strategy for Kroger. The Company is primarily focused on mergers and acquisitions with Companies in the same sector; these are generally lower risk and produce higher returns. Kroger is focused on increasing their footprint in Northern America.

Expanding into the organic market by widening their ‘Simple Truth Organic’ brand line, now a major competitor to US chain Whole Foods Market Inc.

Past Performance

Total return over the past 3 years was 242.9 percent. Total return over the past year was 49.7 percent. This compares favourably to the S&P 500 market index that gained 59.1 percent over three years and 8.9 percent of over one year. As a further comparison Apple gained 52.6 percent over 3 years and 33.3 percent in the last year.

Looking forward

The company aims at consistently growing earnings at a rate of 11 percent each year. Earnings will go towards share buybacks, dividends and investment in new business. Kroger’s positive attitude towards customer loyalty and the shareholder value make the stock an attractive long term investment.