Market Mad House

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

Grocery Wars

Kroger Coronavirus and Controversy

The Kroger Co. (NYSE: KR) is courting with some of its recent actions. First, Kroger plans to end a $2 dollar-an-hour “hero” bonus for its employees.

The nation’s largest standalone grocer is paying the bonus because of coronavirus, CBS News reports. Coronavirus killed four Kroger employees in Michigan, The Detroit Free Press reports. Thousands of other Kroger workers have tested positive for the COVID-19 virus, The United Food and Commercial Workers International Union claims.

In contrast, Kroger repurchased $355 million worth of its stock in the first quarter of 2020. To be fair, they scheduled those stock repurchases before coronavirus reared its ugly head.

In addition, Kroger may not have the cash to pay the $2 bonus to its 453,000 employees. Kroger reported $1.578 billion in cash and short-term investments on 31 January 2020.

Will Kroger Run out of Cash?

Moreover, Kroger reported $616 million in operating cash flow and a negative ending cash flow of -$146 million for the quarter ending on 31 January 2020.

I conclude that Kroger lacks the cash to buy back stocks. Frighteningly, Kroger could also lack the cash to pay a modest hero bonus to employees risking their lives.

Given Kroger’s cash situation, I have to wonder if the 16₵ dividend Kroger scheduled for 14 May 2020 will be the last for some time. I also wonder if it is prudent for retailers to pay dividends under present circumstances.

The Government Needs to Pay the Hero Bonus

However, I think anger at Kroger over the Hero bonus is misdirected. Instead, I think our government needs to pay all grocery and other essential workers a $10 an hour “hero” bonus.

To explain, Uncle Sam; unlike Kroger (NYSE: KR), has unlimited borrowing capacity. Therefore, the federal government has the money to pay huge hero bonuses.

I think it is unfair to ask private companies to take on extra debts to provide essential services. Additionally, I believe it is wrong to ask companies to pay and take risks because of failures of government policy.

To elaborate, I consider America’s coronavirus crisis a failure of public policy attributable to leaders of both political parties. Notably, I think U.S. Speaker of the House Nancy Pelosi (D-California) and President Donald J. Trump (R-Florida) bear equal responsibility for the crisis.

Kroger is the Victim of Bad Government Policy

Driving companies; such as Kroger, that provide essential goods and services into bankruptcy to cover up for the failings of politicians is terrible public policy. Thus, both Kroger and its employees are victims of our leaders’ incompetence.

Sadly, Kroger CEO Rodney McMullen was among the food-industry leaders paying homage to one of the impotent leaders responsible for the crisis. U.S. Vice President Mike Pence (R-Indiana) attended a food industry event where McMullen was present.

Disturbingly, McMullen was among the executives who took off masks during the 8 May 2020 event, The Cincinnati Enquirer charges. Hence, both politicians and executives are behaving irresponsibly.

Instead of criticizing incompetent political leaders, McMullen is paying homage to them. I have to question McMullen’s judgment and priorities.

Is Warren Buffett Wrong about Kroger?

I the lack of cash and McMullen’s actions call Warren Buffett’s investment in Kroger (NYSE KR) into question.

In detail, Berkshire Hathaway (NYSE: BRK.B) bought 19 million shares of Kroger for $549 million in 4th Quarter 2019, Market Mad House estimates. Berkshire can make money from those shares either by selling them for repurchase or dividends.

However, McMullen’s actions are in stark contrast to those of the signature retail genius of our age, Amazon CEO Jeff Bezos. Bezos isolated himself at his remote ranch in rural Texas and took back day-to-day control of Amazon (NASDAQ: AMZN), The New York Times claims.

Thus, Bezos is behaving responsibly while traditional retail leaders; such as McMullen are not. Hence, I think Bezos’ behavior could justify Mr. Market’s valuation of Amazon and Kroger.

Is Amazon Better than Kroger?

To elaborate, Mr. Market paid $34.10 a share for Kroger and $2,367.92 for an Amazon share on 13 May 2020. Moreover, Amazon had $49.292 billion in cash and short-term investments on 31 March 2020.

Additionally, Amazon had $55.021 billion in cash and short-term investment on 31 December 2020. Thus Amazon had huge amounts of cash available when the coronavirus pandemic hit. In contrast, Kroger had just $1.578 billion in cash and short-term investments on 31 January 2020.

I think squirreling an extra $355 million in cash away is a better investment than buying back stock. Interestingly, I think Amazon’s stock price shows that hoarding cash and reinvestment in the company are better for shareholders than stock buybacks. Notably, The New York Times claims Bezos made $25 million from Amazon’s stock price increases during the pandemic.

Perhaps it is time for the U.S. Securities and Exchange Commission (SEC) or Congress to ban stock buybacks. To explain, I think stock buybacks are bad for companies, shareholders, their employees, and society as a whole.

What Value Does Kroger have?

Kroger (NYSE: KR) generated $28.893 billion in revenues from its 2,757 stores during the last reported quarter.

Impressively, Kroger reported a $6.397 billion gross profit for the quarter ending on 31 January 2020. However, Kroger reported an operating income of $537 million and a common net income of $327 million for the same quarter.

Moreover, Kroger reported an operating cash flow of $616 million and a negative ending cash flow of -$146 million for the quarter that ended on 31 January 2020. Thus, Kroger is not making that much money from its operations or keeping much cash.

Hence, I think Kroger’s business model is flawed. To explain, the financial numbers show Kroger cannot capture the cash its business generates.

Thus, Kroger’s management needs to use tricks; such as stock buybacks, to bribe investors into buying its shares. Additionally, Kroger needs to bribe investors to hold its stock with dividends.

Should you Sell Kroger Stock?

Therefore investors need to ask the question should I sell Kroger stock. This question is hard to answer because Kroger’s business still contains a lot of value.

First, Kroger sells products that everybody needs food and basic household supplies. Second, Kroger has an impressive infrastructure that is well-positioned to cash in on the growing popularity of online retail.

For instance, Kroger owns 2,757 supermarkets and other stores that can serve as local and neighborhood fulfillment centers to support same-day delivery. To elaborate, Instacart can pickup grocery orders from a King Soopers or Ralph’s store and deliver them to homes.

Kroger’s existing fulfillment network, which includes 36 food processing plants and 17 dairies, can supply those stores. Plus, Kroger’s employees can pull and pack the online grocery orders. Notably, Kroger was expanding its online capacities before coronavirus. Most Kroger stores offer grocery delivery through Instacart and pickup of online orders

How Kroger can make money with Ghost Kitchens

Furthermore, Kroger’s stores contain delis, commercial kitchens, bakeries, pizzerias, butcher shops, and other cooking and food prep facilities.

Thus I think Kroger could convert its stores into ghost kitchens to service takeout food delivery services such as Grubhub (NYSE: GRUB) fast. To explain, ghost kitchens cook takeout meals customers order online. Services, such as DoorDash or Uber Eats deliver the meals.

Importantly, Uber (NYSE: UBER) founder Travis Kalanick is making big investments in ghost kitchens, Business Insider claims. In detail, Kalanick owns CloudKitchens which owns and operates ghost kitchens. Additionally Kalanick bought City Storage Systems which rents ghost kitchens.

Kroger owns hundreds of facilities that it could use as ghost kitchens. Plus, Kroger already employs thousands of cooks, chefs, sous chefs, bakers, and others who could prepare takeout meals. Consequently, I think Kroger is in a position to dominate the ghost kitchen business if its management wants.

Kroger’s Next Generation Supply Chain

Impressively, Kroger (NYSE: KR) is upgrading its supply chain to compete with Amazon.

Kroger and Ocado Group PLC (LON: OCDO) plan to build 20 Customer Fulfillment Centers (CFCS) across the United States, Market Mad House claims. Ocado robots will pull and pack Kroger grocery orders for same-day delivery at the CFCs. Kroger is constructing the first two CFCs in Groveland, Florida, and Monroe, Ohio.

Kroger and Ocado Group PLC (LON: OCDO) plan to build 20 Customer Fulfillment Centers (CFCS) across the United States, Market Mad House claims. Ocado robots will pull and pack Kroger grocery orders for same-day delivery at the CFCs. Kroger is constructing the first two CFCs in Groveland, Florida, and Monroe, Ohio.

People will still need to eat during future pandemics. Meanwhile, robots are not susceptible to bacteria and biological viruses.

In the final analysis, I think The Kroger Company (NYSE: KR) has a lot of potential value. However, I think Kroger has a questionable business model that generates little cash and creates a low margin of safety. Hence, ordinary investors need to consider selling Kroger and buying something with a higher margin of safety, such as Amazon (NASDAQ: AMZN).