Market Mad House

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

Grocery Wars

Kroger is a Value Investment in Retail

I think Kroger (NYSE: KR) is still a good value, growth, and income investment in retail.

I like Kroger because the company is adopting a proven growth and income strategy despite analysts’ criticism. To elaborate, Jefferies Senior Vice President Christopher Mandeville dislikes Kroger because of its grocery-delivery strategy, CNBC claims.

That strategy is to build 20 giant automated Customer Fulfillment Centers with help from Britain’s Ocado Group PLC (LON: OCDO). The fulfillment centers will serve as regional bases for Kroger’s delivery operations.

Kroger Bets Big on Robots

At the fulfillment centers the Ocado Smart Platform will operate swarms of robots. The robots will pull and pack grocery orders.

Two Kroger Customer Fulfillment Centers are under construction in Groveland, Florida, and Monroe, Ohio. In addition, Chain Store Age claims Kroger has plans for centers in Forest Park, Georgia, and the Mid-Atlantic region.

Kroger is taking a huge risk because the Groveland center is in the Orlando area. Currently, Kroger has no stores in the Orlando market. Therefore, Kroger’s Orlando operations could be delivery only. Kroger has never been a pure delivery operation before.

Moreover, a February 2018 fire destroyed an Ocado robotic fulfillment center in Hampshire, England, The Guardian reports. The fire did £100 million ($126.48 million) in damages, The Guardian claims. To add to the risks, Kroger owns 6% of Ocado.

How Kroger is Copying Amazon

Hence, Kroger is taking huge risks with new technologies and new markets. However, Kroger’s fulfillment center strategy is a proven one.

Amazon (NASDAQ: AMZN) has been building and operating giant fulfillment centers for 20 years. In addition, Amazon makes extensive use of robots in its 175 fulfillment centers.

Notably, the Everything Store owns its robotics company Amazon Robotics; formerly Kiva. Business Insider claims Deutsche Bank estimated Amazon could save $800 million by deploying Kiva robots in fulfillment centers in 2016.

I think the robotic fulfillment center strategy is working at Amazon. Stockrow calculates Amazon had a revenue growth rate of 19.89% in the quarter ending on 30 June 2019.

In addition, Amazon reported a gross profit of $27.097 billion; revenues of $63.404 billion, an operating cash flow of $9.118 billion, and a free cash flow of $6.475 billion on 30 June 2019. Moreover, Amazon reported an operating income of $3.084 billion and a $2.625 billion net income on 30 June 2019.

Kroger’s Robot Strategy is not as risky as analyst says

Thus, the robotic fulfillment center strategy is working at Amazon.

The risks Kroger is taking are great, but those risks are far smaller than the gamble Jeff Bezos took on robots. Amazon proves the fulfillment center and robot strategy works.

Kroger is following a proven strategy that can have lucrative results. However, that strategy will take years to pay off.

I think “experts” like Christopher Mandeville hate such long term strategies because there are no easy to track overnight stock movements. Instead, many experts would rather have Kroger dumping its cash into higher dividends so they can make money. Higher dividend yields can sometimes inflate stock prices which helps speculators make money.

Interestingly, recent history is on Kroger’s side not Mandeville’s. Notably, Amazon’s stock was trading at $1,777.43 on 16 October 2019. Plus, Jeff Bezos is still the world’s richest man with a $110.8 billion fortune that consists largely of Amazon stock.

Personally, I think Bezos knows more far about the future of retail than Mandeville. Hence, I conclude imitating Bezos and ignoring Mandeville is the smart strategy for Kroger.

Is Kroger a Growth Stock?

I believe Kroger is a good growth stock because is capable of jumps in revenue. To demonstrate, Kroger reported quarterly revenues of $28.091 billion on 2 February 2019, and $37.251 billion in quarterly revenues on 25 May 2019.

However, Kroger’s quarterly revenues fell to $28.168 billion on August 8, 2019. Interestingly, Kroger had a similar revenue pattern last year. In detail, Kroger reported $31.03 billion in quarterly revenues on 3 February 2019; $37,772 billion in quarterly revenues on 26 May 2019, and $28.014 billion in quarterly revenues on 18 August 2019.

Thus, Kroger’s revenues are down from last year. Consequently, management is wisely changing strategies to reverse that trend.

In addition, Kroger suffered three quarters of revenue growth decline over the last year. In detail, Stockrow estimates Kroger had revenue growth drops of; -0.28% on 10 November 2019, -9.47% on 2 February 2019, and -1.25% on 25 May 2019.

In contrast, Kroger had a revenue growth rate of 0.55% on 17 August 2019. Hence, Kroger’s revenue growth could turn around without the robotic fulfillment centers. However, that growth rate is still far below Amazon’s gusher of revenue growth.

Importantly, no revenue growth figures from the robotic fulfillment centers could be available for months or years. Hence, nobody knows how those facilities will affect Kroger’s revenues or profits.

Is Kroger Making Money?

Kroger is making money despite the revenue growth declines. Specifically, Kroger reported a gross profit of $6.161 billion for the quarter ending on 17 August 2019.

That gross profit was down from the $8.268 billion reported on 25 May 2019, and the $6.118 billion reported on 2 February 2019. Additionally, Kroger reported an operating income of $559 million and a net income of $297 million on 17 August 2019.

The low income figures show why Kroger is radically changing its business plan. Kroger can generate a lot of cash with business, but it is not keeping much cash.

For instance, Kroger reported an operating cash flow of $1.009 billion on 17 August 2019, down from $2.268 billion. However, that operating cash flow is up from $431 million reported on 2 February 2019 and $892 million reported on 18 August 2018.

Kroger Needs Cash to Compete with Amazon

Plus Kroger reported a free cash flow of $319 million on 17 August 2019, down from $1.397 billion on 25 May 2019. Conversely, that free cash flow is nearly double the $163 million Kroger reported on 18 August 2019.

Finally, Kroger reported cash and equivalents of $629 million on 17 August 2019. That number was up from $409 million on 25 May 2019 and $361 million on 18 August 2019.

Hence, Kroger is generating some additional cash but it needs far more cash to compete with Amazon. Amazon reported cash and short-term investments of $41.463 billion on 30 June 2019.

These numbers expose a huge risk at Kroger. The grocery giant could lack the cash to finance the robotic fulfillment centers.

Hence, Kroger could have to borrow money, seek outside investment, sell assets, or cut operations to finance the robotic delivery operations. Thus, Kroger could increase its debts and cut cash flow from proven operations to finance its robotic grocery experiment. Thus, Mandeville has a good point about the risks Kroger is taking.

Kroger is a Growth and Value investment

However, I think Kroger (NYSE: KR) is a growth stock, because it has a management team that recognizes its business model’s problems. Moreover, the management team is trying to implement a new business model that could lead to large growth in revenues and cash flow.

Conversely, I consider Kroger a value investment now because it has a low stock price, large operations, and makes money. Kroger has a low stock price, $24.51 on 16 October 2019.

Kroger has a lot of other value. For instance, Kroger is the fifth largest pharmacy operator in the United States with 2,770 pharmacies in 35 states. In addition, Kroger owns 36 food production plants, 17 dairies, over 1,400 Simple Truth Brand organic products 319 Fred Meyer jewelry stores, 1,1537 supermarket fuel centers, 44 distribution centers, and 2,761 supermarkets and super centers.

Therefore, Kroger has a lot of value that it can leverage to grow the robotic operations. For instance, Kroger can deliver products it manufactures at its food production plants. In addition, Kroger can offer deep delivery discounts by delivering its popular private label brands.

Is Kroger a Good Dividend Stock?

Thus, I classify Kroger has a growth and value investment. Yet, I consider Kroger a good dividend stock because of its low share price.

In fact, credits Kroger (NYSE: KR) with 10 years of dividend growth. Kroger shares offered a dividend yield of 2.63%, an annualized payout of 64₵, and a payout ratio of 30.2% on 16 October 2019.

Kroger shares paid a 16₵ dividend on 14 August 2019. Impressively, Kroger’s dividend grew by 2₵ in 2019. Kroger’s dividend rose from 14₵ on 14 May 2019 to 16₵ on 14 August 2019.

Kroger Stock is a bargain  in the robotization of retail

Kroger is a cheap moneymaking company that pays a dividend. In fact, Mr. Market priced Kroger at $24.51 on 16 October 2019.

In contrast, Amazon shares were trading at $1,777.43 on the same day. Hence, those seeking cheaper stocks with Amazon’s attributes need to examine Kroger.

For instance, Kroger is trying to imitate Amazon’s business model of robot-operated fulfillment centers. Therefore, I consider Kroger shares worth the risks. Indeed, I consider Kroger less risky than Amazon because it has a lower share price and pays dividends. Amazon famously pays no dividend.

I think Kroger is a good value and growth stock for those who want to want to take a risk on the robotization of retail.