Does the Stock Split Make Kroger a Greater Value?

Kroger (NYSE: KR) did something rather rare and interesting in June that has not been found for quite a while—it split its stock.

For confused younger investors, a stock split is an old school strategy designed to protect a management team’s position. Such a move is usually undertaken to make one investor, such as a hedge fund, get control of a large portion of a company’s stock.

Kroger split its stock two to for one, which reduced the share price from around $70 in June to $39.24 a share on July 31, 2015. The major idea behind this is probably to protect the company self-styled activist investors, such as Carl Icahn, who try to dictate corporate policies that increase stock values in order to line their own pockets.

Kroger Rewards Employees

Another reason was to pay back Kroger’s very loyal employees. The split makes the stock a lot cheaper, which makes it easier for clerks, assistant managers, baggers and truck drivers to afford the shares. That enables the management team to share the benefits of the company with the workers.

“We are especially excited that the stock split will make Kroger’s common shares more accessible to all of our associates,” Kroger CEO and Chairman Rodney McMullen said in a press release.

That’s another reason why I really like Kroger; it actually values its employees or associates and treats them like human beings. Too many retailers treat their employees like cattle then do not realize why customer service is poor. That, of course, is one reason why customer service is so good at Kroger and its subsidiaries such as City Market and Fred Meyer.

This makes Kroger a value investment as in values with a capital V; it treats its employees well. The management works for everybody’s benefit rather than to line their own pockets.

It also bucks the trend in corporate America; most executive teams resist splits in order to inflate stock prices and their own net worth. One of the reasons why we’ve seen such ridiculously high share prices at companies like Google Inc. and Amazon in recent years is the refusal of management to split the stock.

Is Kroger Still a Good Investment?

Okay, now for the question that a lot of people are probably wondering about: Is Kroger still a good value investment? My answer is yes because it is even cheaper than it was before.

The financial numbers that Kroger reported on April 30, 2015, were great, and they might get better. The highlights of Kroger’s latest quarterly report included:

• A TTM revenue of $108.56 billion. That makes Kroger America’s third or fourth largest retailer depending upon who you ask. If you just count retail revenue, Kroger is the third largest retailer in America behind Walmart Stores Inc. (NYSE: WMT), which reported a TTM revenue of $485.52 billion on April 30, and Costco Wholesale (NASDAQ: COST), which reported a TTM revenue of $115.94 billion on March 31. Kroger was fourth behind Walmart CVS Health (NYSE: CVS), which has a large healthcare management business in addition to hundreds of drugstores and reported a TTM revenue of $143.01 billion on March 31, and Costco.

 

• A net income of $1.846 billion.

• A diluted EPS number of 1.864.

 

• A profit margin of 1.87%.

 

• A forward dividend yield of 1.07%.

 

• A dividend yield of .92%.

 

• A payout rate of 18.69%.

 

• A free cash flow of $876 million.

 

• A return on equity of 35.45%.

 

As you can see, Kroger is still what you might call a widows and orphans stock. That is a very safe equity with a nice rate of return.

Can Kroger Keep Growing?

It’s also a really good company, but there is one figure that concerns me: Kroger reported a year to year revenue growth rate of .27% on April 30, 2015. That was down from January 2015 when it reported a rate of 8.55%. Okay, that’s not so bad if you look at the chart; Kroger reported a rate of -3.33% in January 2014.

The reason for the roller coaster growth is probably the effects of Kroger’s $2.5 billion acquisition of the Harris Teeter supermarkets last year. The absorption of such a large regional grocer—Harris Teeter operates 150 stores—obviously distorted Kroger’s revenue.

Naturally, a lot of people will wonder if Kroger can grow without major acquisitions, which are farther and fewer between. The best response to this question is possibly because there is a lot of room for growth in the grocery business. Kroger is also pursuing a number of strategies for growth that are not as dramatic as a major acquisition but potentially just as lucrative.

Kroger’s Growth Strategies

One potential area of growth that Kroger is exploiting are smaller regional acquisitions. It recently bought seven Hiller’s Market Stores in Michigan and reopened five of them as Kroger’s locations, The Detroit Free Press reported. There are many such smaller regional chains around the country, including some of the former A&P locations in the Northeast and many stores in areas that the new Safeway/Albertsons combination is pulling out of.

A more intriguing area of growth is in delivery and online shopping options such as Click and Pull and home delivery. Kroger is currently testing a click and pull service that gives customers a choice of thousands of items they can order online at its store in Liberty Township, Ohio, The Cincinnati Enquirer reported. The service lets shoppers place an order for groceries online. Employees then pull and bag the items, and the customer picks them up.

Currently, the service is only available to a few loyal customers and Kroger employees. Kroger hopes to expand the service to another location in the same area as it expands the test. Kroger also offers a more traditional home delivery service through its King Soopers subsidiary in Colorado.

Kroger could also make another ecommerce acquisition; it bought the vitamin supplier Vitacost.com for $280 million last year. Another possibility would be for Kroger to join in Google’s Google Express delivery experiments.

Kroger on the March

The most likely strategy for Kroger, though, is a more traditional one: simply build more stores, particularly its mammoth Marketplaces—supercenters that offer such products as jewelry, furniture and clothing in addition to groceries. There seems to be a lot of room for such facilities in America. Another is to add more supermarket fuel centers; the company operated around 2,635 supermarkets but only 1,330 fuel centers in 2014.

Most of this expansion will be on Kroger’s home turf in the Midwest; in April The Associated Press reported that the grocer is planning a $500 million expansion in Central Indiana. That effort will include the construction of seven marketplaces, 16 new gas stations and seven new supermarkets. News reports indicate that Kroger has embarked upon major expansion efforts in the Carolinas, Virginia and Texas. Another region that could be ripe for expansion is Colorado.

Another area of growth is to add more amenities to existing stores to increase business. This includes gourmet cheese counters, Little Clinics, and restaurants. A final area of growth is organics, a field where market leader Whole Foods Market (NASDAQ: WFM) is vulnerable because of high prices and lack of additional amenities such as gas stations and pharmacies. Sales of Kroger’s store brand organic products hit $1 billion last year, Bloomberg reported.

So Kroger is a really good company in an industry where there is a lot of room for growth. Kroger could be even more of a value investment after the stock split because it looks poised to dominate the grocery business in many areas of the U.S.

Disclosure: Your blogger is an enthusiastic Kroger stock holder.