Currently there is only one big American retailer that I view as a buy and hold value stock, and it is—surprise—the giant grocer Kroger (NYSE: KR). There are several reasons why I like Kroger even though I am skeptical of the entire retail sector.
What I like most about Kroger right now is the price; on November 30, 2015, it was trading at $37.67 a share because of a stock split over the summer. This makes Kroger one of the few big retail stocks that is not overvalued right now.
More importantly, Kroger is simply a very good basic stock; on July 31, 2015, it provided investors with a dividend yield of 1.07% and a return on equity of 35.53%. That is a pretty good performance for a basic brick-and-mortar retailer.
The price is the reason you should buy Kroger now because it’s a really good company with a bright future. More important, it is in an enviable position for a retailer, as I shall demonstrate below.
The Buy and Hold Case for Kroger
My buy and hold argument for Kroger is based on current conditions in the grocery business and retail in general. Long-term trends favor Kroger at the expense of some of its traditional rivals. These include:
The inability of smaller grocers to remain competitive in today’s marketplace. This gives Kroger the ability to expand both its market share and revenue at a very low cost. Kroger just picked up Roundy’s (NYSE: RNDY), a Milwaukee-based company with four grocery brands, 151 supermarkets and $4.28 billion in revenue for $800 million. The Roundy’s acquisition would increase Kroger’s revenue to $113.038 billion from the $108.78 billion the chain reported on September 30, 2015.
Buying Roundy’s allows Kroger to expand into two additional metropolitan areas, Chicago and Milwaukee, and another state, Wisconsin, for just $800 million. Among other things, Roundy’s has a 39% share of the Milwaukee-area grocery business through its Pick ‘n Save subsidiary.
The economy of scale needed to offer the low prices that consumers expect in today’s marketplace. Since it operates around 2,700 stores, Kroger can effectively compete with deep discounters, including Wal-Mart and dollar stores. David Livingston, a Wisconsin grocery consultant told The Milwaukee Journal-Sentinel that he thinks prices at Pick ‘n’ Save could fall by as much as 5% when Kroger takes over.
The growing popularity of online retailers led by the monstrous Amazon.com. This trend favors Kroger because it sells a wide variety of goods that might never be sold online, including prescriptions, fuel, and many groceries. It also gives people fewer reasons to travel to big box discounters to shop because they are ordering things like clothes and electronics online. That makes them more likely to make routine purchases at a neighborhood grocery store.
The investments that Kroger is making in its own online infrastructure. These include a click and pull capability for online grocery orders, same day delivery services and the online vitamin retailer Vitacost, which Kroger bought last year.
Being on top of trends in the grocery and discount sectors. In recent years Kroger has demonstrated it was ahead of the curve in such areas as instore clinics, pharmacies, diversification, instore cafes, organics and supercenters.
My prediction is that Kroger will keep expanding and growing its revenues because regional grocers cannot compete and in some cases are unable to survive. At the time of its acquisition, Roundy’s was facing a third quarter loss of $8.6 million even though its revenues had actually been growing.
These conditions allow Kroger to buy regional grocers with substantial market share and established brand names at a very low price. That makes for cheap and fairly quick expansion without some traditional expansion costs, such as building new stores.
Why Kroger Will Keep Expanding
Kroger is in an excellent position to move into new markets in the next few years and greatly increase its revenues and market share over the next few years. Regions that might be ripe for such expansion include the Upper Midwest, particularly Minnesota; New England; the Mid-Atlantic states; New York and Florida.
These areas feature intense competition in the grocery business and lots of smaller regional chains struggling to survive. Traditional grocers in those areas have also been hard hit by competition from Walmart, Costco and deep discounters like dollar stores and Aldi. That will make it easy for Kroger to scoop up even more regional grocers and expand its footprint at a low cost.
All of this makes Kroger a good buy and hold play because it is low priced, is unsexy, and has a lot of growth potential. It also makes Kroger a good alternative to retailers such as Walmart and Target, which I view as overpriced in today’s market.
Disclosure: the Blogger owns shares of Kroger and plans to keep them for a long, long time.