Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery WarsMarket Insanity

Is Kroger in Trouble?

A lot of people will wonder if Kroger (NYSE: KR) is in trouble because the grocery giant is selling all of its convenience stores.  

Kroger has agreed to sell all of its convenience store brands; which include Loaf ‘N Jug, Tom Thumb, Kwik Shop, and Turkey Hill, to a British company called EG Group, The Associated Press reported. The stores are a major part of Kroger’s footprint but an argument can be made that they distract from the company’s core business of groceries.

Kroger plans to use the $2.1 billion it would receive from the sale to pay off debt and buy back stock. Skeptics will wonder if Kroger simply needs the cash, and they may have a point.

Is Kroger Losing Money on its Operations?

Kroger reported a year-to-year net income of just $397 million and a year-to-year operating income of $740 million in November 2018, Google data indicates. The operating income grew by 3.79% and the net income grew by 1.53% in 3rd Quarter 2017.

Kroger’s income simply is not growing that fast or that big, despite healthy revenue growth. Kroger’s year to year revenues grew by 4.49% to $27.75 billion during 3rd quarter 2017.

The problem with that revenue is that it is translating into cash. Kroger’s year-to-year cash fell by $467 million or 949.09% during third quarter 2017. Worse, Kroger’s  year-to-year cash on hand fell by 5.88% to just $352 million during the same period.

It looks as if Kroger is dangerously close to losing money on its operations. Kroger had a net profit margin of 1.43% in 3rd Quarter 2017; that fell by 2.72% on a year-to-year basis from 2016.

Should Kroger Sell Off the Convenience Stores?

Selling off questionable assets like convenience stores makes a lot of sense at this time. Changes and possible changes to the fuel and grocery markets might soon make convenience stores and filling stations a drag on Kroger’s business.

Falling oil prices are dragging down the prices of gasoline and diesel fuel. Fears of an oil glut driven by rising U.S. production are driving down oil prices. That can hurt Kroger which has to cut its fuel prices to compete.

The situation is made worse by Kroger’s popular fuel points program which forces it to engage in some very deep discounting for fuel. That might make some Kroger fuel centers and convenience stores unprofitable to operate.

Will Kroger Kill its Reward Points Program?

EG Group has not said if it will continue the Kroger fuel rewards that Kroger convenience stores currently accept. Cutting out the fuel rewards would at the convenience stores, would save both companies money.

Eliminating the convenience stores from the program would make it easier for Kroger to shut down the entire rewards points program. A strong possibility is that Kroger will only accept points at its filling stations, or make them just for groceries. Either way, there is a strong possibility that Kroger fuel points might die soon.

Electric cars are another reason why Kroger wanted out of filling stations. The potential impending large-scale adoption of electric vehicles would force Kroger to add expensive new infrastructure and technology to its convenience stores.

Did Kroger Sell the Convenience Stores because of Electric Cars?

Another calculation here is that electric vehicles might reduce business at convenience stores. If large numbers of people start charging their vehicles at home while they sleep, at work, or when eating lunch or shopping, convenience stores might lose customers.

This might benefit Kroger which can tap that market by simply adding superchargers to its parking lots. The superchargers are a major threat to convenience store operators because their infrastructure is less complex and does not require an attendant and large tanks, and presents less of a fire risk.

Kroger might be able to lure electric vehicle owners into its store via free charging, or deep discounts on charging through the rewards program. Instead of sitting bored listening to the radio, in the car the EV driver would go into Kroger to shop or grab a bite to eat from the deli.

Best of all, Kroger would not need to hire any additional labor to run the chargers because the driver would plug the vehicle in himself. Free charging for electrics would be great means of enticing electric-vehicle drivers to Kroger.

Does Kroger have a Lesson for Amazon stockholders?

Amazon (NASDAQ: AMZN) stockholders should pay close attention to Kroger. Like Amazon, Kroger is a giant discount retailer with a vast and growing footprint and an elaborate high-tech infrastructure with a lot of competitors.

The difference is that Kroger is struggling to retain income and cash, while Amazon is not. Amazon reported a year-to-year net income of $1.86 billion in December 2017, which grew by 147.93%. That sounds great until you realize that Amazon’s revenue for 3rd quarter 2017 was $60.45 billion.

Like Kroger, Amazon has large growing revenues and limited income growth. Amazon had a year-to-year operating income of $2.13 billion in December 2017. Yet, like Kroger, it had limited profit margin just 3.07% in 3rd Quarter 2017.

That means all it would take is one or two bad quarters for Amazon to end up in the same situation as Kroger. Selling assets, and trying to make up for shrinking cash on hand. Amazon’s year to year cash hand was great in December 2017 at $20.52 billion, but all it would take is a couple of quarters of losses to eat that up.

Kroger’s situation proves that income and cash growth are not guaranteed in retail. They can stop at any time, and start falling even as revenue grows.

Kroger is still a Value Investment?

Despite the recent troubles, Kroger is still a value investment because it is relatively cheap – $28.46 a share on 14 February 2018. The company still makes some money, and it is in a great position for expansion.

One strong possibility is that Kroger will use the cash from the convenience store sell to buy more supermarket brands and expand its footprint. Another is that Kroger will ramp up same-day delivery and online shopping efforts to counter Amazon’s grocery push.

Either way, Kroger is still a good company that is capable of making money. Those looking for retail value investments should take a close look at Kroger.