America’s largest standalone grocer Kroger (NYSE: KR) has become the Rodney Dangerfield of retail. Like the legendary comedian, Kroger gets no respect no matter what it does.
Nothing Kroger does can earn Mr. Market’s respect; not 16 straight quarters of revenue growth, or revenues of $118.05 billion. Despite those numbers, which are blatantly obvious on ycharts, Kroger shares were trading at $20.20 on 26 September 2017. Also ignored are Kroger’s technological advances it is a leading in online ordering of groceries and might be ahead of Amazon (NASDAQ: AMZN) in same-day delivery.
Many investors will sense a value investment at Kroger because it is clearly undervalued and dismissed by the market. Kroger certainly has a vast amount of value that Mr. Market cannot even see – leading many to conclude he is blind as well as insane.
Yet skeptics will wonder if Mr. Market onto something about Kroger. It is in a difficult business with low-operating margins and lots of competition. The answer perhaps, but no matter you look at it Kroger has a lot of value.
Kroger has an Incredible Amount of Value
All investors need to take a closer look at Kroger because it is very cheap but has an incredible amount of value. Examples of that value include:
- $4.465 billion in cash from operations on July 31, 2017. This figure approached that of investor favorite Costco Wholesale (NASDAQ: COST) which reported $4.723 billion in cash from operations on May 31, 2017.
- Assets of $36.60 billion on July 31, 2017.
- A footprint that included 2,796 supermarkets, 784 convenience stores, 1,445 supermarket fuel centers, 319 fine jewelry stores, 38 food production plants and 38 distribution centers in 35 states at the end of fiscal 2016 according to the 2016 Kroger Fact Book.
- Kroger’s online ordering option; Clicklist, was offered at 637 supermarkets at the end of Fiscal 2016, the Fact Book reported.
- Kroger owns a vast amount of real estate, 48% of its markets were located in company-owned facilities at the end of 2016. That means Kroger might own around 1,342 choice retail locations around the United States.
- Kroger operates supermarkets in three of America’s five largest cities: Los Angeles, Chicago and Houston. It operates Murphy’s Cheese, a specialty shop in America’s largest city: New York.
- Kroger has impressive geographic coverage. It operates in every Western State and every Southern State.
- Kroger operated 153 marketplace stores, its version of Supercenters at the end of 2016.
- Kroger claims to have filled nearly 185 million prescriptions in 2016.
- One Kroger private-label brand alone; its Simple Truth natural and organic marquee, might be worth $1 billion, Seeking Alpha scribe Harshal Patel estimated.
All this will pique the interest of both value and contrarian investors. Particularly those who notice how crazy the market is acting because of Amazon’s Whole Foods deal. After all Whole Foods has only around 400 locations, Kroger has 3,580 when the number of convenience stores and supermarkets is added up.
That means Kroger is 10 times the size of Whole Foods. One has to wonder how Amazon is supposed to compete if Kroger starts offering ClickList and Uber same-delivery at each of its brick and mortar locations.
Does Kroger Make Money?
There’s a serious problem with Kroger’s vast footprint that calls Amazon’s Whole Foods acquisition into serious question. Kroger’s gigantic grocery operations are not making that much money.
Some evidence that Mr. Market might be right about Kroger includes:
- Declining income. Kroger reported a net income of $1.553 billion on July 31, 2017. That was a major drop from $2.066 billion in July 2016. Kroger’s income fell by $513 during the 12 months that ended on July 31, 2017.
- A low-profit margin 1.28% on July 31, 2017.
- Limited free cash flow, $311 million on July 31, 2017.
- Very little float, Kroger reported just $819 million in cash and short-term investments on July 31, 2017. This figure was up from $319 million on July 31, 2016.
A major cause of this is deflation of both food and fuel prices. Kroger is simply making less money from two of its core businesses. Note: this can help Kroger in the long run because it drives competitors out of business, and makes it easier for Kroger to acquire other grocers.
Is Mr. Market Right about Kroger?
Unlike regional grocers, Kroger has the cash to survive and acquire them when they run out of money. A strong possibility is that Kroger will use the additional cash and short-term investments for a major acquisition; possibly Winn-Dixie or Raley’s.
Other problems include vast amounts of competition particularly from Walmart (NASDAQ: WMT) and fast-growing discount grocer Aldi. The Amazon/Whole Foods combination is a potential menace, particularly if Amazon starts buying up grocers such as Safeway, HEB, or Winn-Dixie.
A major problem for Kroger is that it now may have no choice but to buy competitors such as Supervalu (NYSE: SVU) and Sprouts (NASDAQ: SFM). If Kroger does not buy them, Amazon might and increase pressure on it.
This puts Kroger in a very difficult position but I think it is still a value investment. Kroger is definitely undervalued; ycharts gave a market capitalization of $17.97 billion and an enterprise value of $30.95 billion on September 26, 2017.
It also offers a pretty good dividend of 12.5¢ a share scheduled for November 14, 2017. That dividend increased by .5¢ over the summer rising from 12¢ to 12.5¢ on 11 August.
Would Amazon Buy Kroger?
Finally, Kroger’s low price raises an intriguing possibility that will creep some people out. What would happen if Amazon bought Kroger?
It’s not probable; and might not pass muster with the Federal Trade Commission (FTC), but it is a possibility we need to consider right now. Kroger is such a tremendous bargain right now, that it might attract Jeff Bezos’ attention.
Judging by the numbers, Kroger is a bargain right now. Persons with extra cash would be well advised to buy it because there’s a lot of value here. This supermarket operator’s share price will shoot up when Mr. Market realizes its true potential.