Kroger has Far More Value than You Think

Kroger (NYSE: KR) might have far more value than some investors think. The supermarket giant has an incredibly valuable and growing asset in the form of its massive footprint.

On September 15, 2016, Moody’s Investors Service concluded that “Brick-and-mortar retailers such as Walmart (NYSE: WMT) and Best Buy (NYSE: BBY) are not only surviving online, but are actually thriving, due to their sizable physical assets and riding the online wave started by Amazon.”

Kroger’s Vast Infrastructure

The same can be said for Kroger; which now operates a vast physical infrastructure consisting of 2,781 supermarkets, 39 distribution centers, 38 manufacturing plants, and 785 convenience stores in 36 states and the District of Columbia. Kroger’s infrastructure now reaches most of the major metropolitan areas in the United States including; Los Angeles, Chicago, San Diego, Las Vegas, Salt Lake City, Sacramento, Denver, Dallas-Fort Worth, Atlanta, Phoenix, Portland, Oregon, Seattle, the San Francisco Bay Area, Houston, Washington D.C., Charlotte, and Detroit.

Kroger’s network is almost three times the size of Moody’s favorite Best Buy; which currently operates around 1,050 stores. It is also growing through both acquisition and organic expansion. Last year Kroger bought Roundy’s; which operates 151 in Wisconsin and Chicagoland. In 2015 it purchased Harris Teeter which operates 234 stores in the South and Mid-Atlantic region.

There is also plenty of room for growth in Kroger’s existing footprint. It is opening new Marketplaces; its equivalent of a Walmart supercenter, throughout the south, Mid-Atlantic and Midwest. A new Marketplace in White Lake Township, Michigan, features a Pan Asian restaurant, a Sushi Bar, a Cheese Bistro, a filling station and a Starbucks, Hometown Life reported. Kroger plans to open to open two Marketplace locations in Detroit next year.

One intriguing opportunity Kroger is to fill the void left by the collapse of Kmart and Sears. The Marketplace in White Lake was built on the site of an abandoned Kmart store.

There’s also plenty of room for geographic expansion out there with cheap ailing supermarket chains like SUPERVALU (NYSE: SVU) out there. SUPERVALU has a major share of the grocery market in two major metropolitan areas (Minneapolis and St. Louis) yet its shares were trading at $4.68 on September 22, 2016.

Value investors should take notice because Kroger was trading at just $31.84 a share on September 22, 2016. That makes it cheaper than Best Buy which was trading at $38.52 a share and Walmart; which was fetching $72.35 a share on the same day.

Kroger’s Online Opportunities

What’s more intriguing is that Kroger also meets some of Moody’s other criteria. It analysts like Best Buy and Walmart because of their online capabilities. These include a buy online/pickup in store; or click and pull option, and online ordering and delivery.

Kroger has also made some major investments in online infrastructure. It purchased the online vitamin retailer Vitacost for $280 million in 2014. More importantly Kroger has developed a significant buy online/pickup instore capability called Checklist which is available through some of its major brands including King Soopers in Denver.

Kroger also offers a Home Shop or Shop and Stock home delivery option in some areas. The King Soopers Home Shop in Colorado even offers some items Amazon (NASDAQ: AMZN) will not touch including wine, beer and hard liquor, meat, dairy products, flowers and cheese. A logical extension will be prescriptions from Kroger’s 2,231 pharmacies.

A logical extension of this will be hard goods from the Kroger stores that contain a Fred Meyer Jewelry store or an Apparel & Shoe or Home Store section. Home Store sells small appliances, kitchen utensils, dishes, silverware and lines.

A long term prospect for Kroger would be to start shipping items directly from its distribution centers and manufacturing to customers. Kroger’s manufacturing operations including 17 dairies, 12 bakeries, two meatpacking plants, and seven plants that make groceries or beverages.

Or to lockers at the convenience stores where customers can pick them when they get gas. Walmart is experimenting with such lockers in the United Kingdom and Canada. Another opportunity is to have such a pick up locations at its 1,397 supermarket fuel centers or inside the supermarkets.

Kroger is well positioned to take advantage of another major opportunity in retail: the use of networked-transportation solutions like Lyft and Uber for same day delivery. Walmart is already experimenting with this in Phoenix and Denver. Kroger’s stores would serve as ideal hubs for such drivers and it offers a wide variety of products that would be ideal for such a solution including hot meals, prescriptions and groceries.

These online capabilities might be critical in the years ahead because Moody’s estimate they will facilitate 40% to 50% of all online sales by brick and mortar retailers in the near future. More importantly they can drive additional foot and car traffic to Kroger’s stores and filling stations.

A major advantage Kroger has here is brand loyalty. It already has millions of loyal customers that visit its stores many of whom participate in its impressive loyalty program. Having Kroger come to them is the next logical extension.

Kroger is making a Lot of Money

All this means that Kroger actually exceeds Best Buy in the attributes that Moody’s is extolling. That makes it a very good growth stock, but value investors will ask: “does Kroger make money?”

The answer is yes Kroger is currently making a lot of money. It reported some really impressive financial numbers for July 31, 2016 including:

• Revenues of $112.41 billion. This makes Kroger America’s sixth largest publicly traded retailer behind Walmart, CVS Health, Amazon, Costco and Walgreen.

 

• A net income of $2.05 billion.

• A profit margin of 1.44%.

 

• A free cash flow of $24 million.

 

• Assets of $34.66 billion.

 

• Cash and short-term investments of $319 million.

 

• $5.11 billion in cash from operations.

 

Why Kroger is a Better Investment than Best Buy or Target

Okay these figures are far from perfect but the amount of revenue Kroger is currently generating gives it the resources to build an online infrastructure potentially rivaling Walmart. Kroger’s are nearly twice those of Target (NYSE: TGT) which reported revenues of $71.6 billion on July 31, 2016, and three times the size of Best Buy’s. Best Buy reported revenues of $39.42 billion on July 31, 2016.

Another advantage is that Kroger’s revenues are growing while Target’s and Best Buy’s are shrinking. Between July 2015 and July 2016, Best Buy’s revenues fell by $840 million dropping from $40.38 billion to $39.42 billion. Target’s revenue fell by $1.95 billion; dropping from $73.55 billion in July 2015 to $71.6 billion in July 2016.

During the same period Kroger’s revenue increased by $3.63 billion; rising from $108.78 billion in July 2016 to $112.41 billion. Kroger not only has a lot of opportunities for growth, it is growing dramatically right now.

To add icing to the cake Kroger’s investors are actually making money. On September 22, 2016, they made a dividend yield 1.41%. Kroger investors received a return on equity of 32.03% on June 30, 104.. They also took home a dividend of 12¢ a share on August 11, 2016. That may not sound like much but if you had owned 100 shares of Kroger stock on that date, you made an additional $12 on the dividend alone.

All this means that Kroger might be the best stock to buy take advantage of the paradigm shift that is transforming American retail.