Kroger’s Revenue Growth Now Exceeds Walmart’s

It is easy to see why the management team at Walmart Stores Inc. (NYSE: WMT) is making so many bold and extraordinary moves these days. The amount of revenue growth at America’s largest grocer, Kroger (NYSE: KR), over the past year exceeded that of the world’s retailer.

Between April 2014 and April 2015 Walmart’s revenues grew by $8.34 billion, rising from $477.18 billion in 2014 to $485.52 billion in 2015. Meanwhile, Kroger’s TTM revenue grew by $10.09 billion between January 2014 and January 2015. Kroger reported a TTM revenue of $98.38 billion in January 2014 that grew to $108.47 billion in January 2015.

Get the picture, folks; the amount of Kroger’s revenue growth exceeded Walmart’s by $1.66 billion. That should be of concern to Walmart investors and to its executives because Walmart reported a market cap of $232.43 billion and an enterprise value of $274.63 billion on June 15, 2015. Kroger had a market cap of $35.07 billion and an enterprise value of $45.62 billion on the same day.

The revenue picture shows that Walmart has some pretty deep problems. Here in the U.S. its big box stores have lost their allure to shoppers that are struggling with a lack of disposable income. Customers’ desire for more convenience and the rise of a new generation of shoppers that simply do not peruse big box stores have hit the behemoth from Bentonville hard.

Geography Is Walmart’s Enemy

Another problem facing Walmart is rooted in geography. The retail giant is heavily exposed to some dismal overseas economies, including that of Brazil, which is facing its first back to back decline in gross domestic product since the Great Depression, according to The Wall Street Journal. Walmart operates 557 retail units in Brazil.

Here at home, Walmart’s operations are heavily geared towards some of the areas that have not shared in the “recovery.” Its supercenters are found mostly in the South, Southwest and the Rustbelt rather than in the booming cities like those in the San Francisco Bay area. Another problem Walmart faces is intense competition in some of its core businesses, such as groceries.

Walmart’s stores are more likely to be found in the 81% of United States counties where the average income has fallen since 1999 than in the 19% where it has increased. Within metropolitan areas, Walmart’s stores are more likely to be found in working class neighborhoods where recovery is a word on the TV news rather than reality.

Walmart’s traditional business model is dependent on a working class and middle class that has a high level of disposable income: workers that have the extra cash to spend $100 to $200 on a trip to the supercenter and the cash to drive there. That is no longer the case. Many Americans are struggling to make ends meet; around 46 million people were still on food stamps in May, according to The Wall Street Journal.

Kroger Is Well Positioned to Take Advantage of the New American Realities

Kroger’s revenues are growing because it is well positioned to take advantage of these new American realities, while Walmart is not. For example, it operates neighborhood stores, and its basic product is one people have to buy regardless of the economy: food.

Kroger has also done a good job appealing to millennials, the cash-strapped working class and the increasingly affluent elements in our society. In September 2014 Bloomberg reported that Kroger had sold $1 billion worth of its private label organic products in less than a year.

The super grocer is also rolling out intriguing new cutting edge retail capabilities all the time. One of these is its click and pull service, which is designed to appeal to modern shoppers’ desire for convenience.

The current version in Ohio and Kentucky (Kroger’s home turf) lets shoppers place a grocery order for a flat fee of $4.95, The Cincinnati Inquirer reported. For that price, Kroger employees pull the products from the shelf and bag them. The customer then picks up the items at a drive-through window without having to enter the store at all.

I cannot think of anything that will be more appealing to harried soccer moms. Kroger has figured out how to reduce the weekly or daily grocery trip to a five-minute run through a drive through. This and its delivery service put Kroger in a great position to get millennials’ business. After all, millennials are the generation that grew up with ecommerce; some of them cannot remember the world without Amazon.com (NASDAQ: AMZN).

Walmart Playing Catch Up

Walmart now finds itself playing catch up to a variety of retailers, including Kroger, Dollar General (NYSE: DG), Costco Wholesale (NASDAQ: COST) and Amazon. Naturally, investors will be wondering if they should be worried.

I would say not, because Walmart is a great company at playing catch up; unlike some retailers, it learns from its mistakes and copies others. As I noted elsewhere, Walmart has already mastered the small-box model and come up with a better small box than Dollar General’s. Walmart’s answer to the dollar stores, Walmart Neighborhood Market, offers some amenities that Dollar General and Dollar Tree (NASDAQ: DLTR) lack, including pharmacies and, in some cases, gas stations.

Walmart is also developing impressive online capabilities, including fulfillment centers to match Amazon. It’s also playing around with Shipping Pass (its answer to Amazon Prime), which would give customers free delivery for a $50-a-year payment and is promoting it with some interesting social media strategies. Not to mention its own delivery and click and pull services.

Historically, Walmart has been good about adapting to changing retail trends and catching up to competition. In the big box era, it had to play catch up to Kmart (remember that chain?), which had a head start in the big box arena; Walmart did and eventually left Kmart in the dust.

Walmart was the first national retailer in the USA to grasp the supercenter concept and implement it. It was also the first national chain to understand that customers were moving away from malls and department stores to one-stop shopping at the supercenter.

Do Not Count Walmart out of the Game

So I wouldn’t count Walmart out; it’s a great company that has some tremendous resources to play with. Walmart reported a free cash flow of $2.243 billion on April 30, 2015.

Kroger provided a return on equity of 33.41% and a dividend yield of 1.01%. The grocer also reported a negative free cash flow of -$67 million, which shows some of the limits of its business model.

Both Kroger and Walmart are good investments right now, although Kroger might be a better long-term investment if it can keep up its impressive level of revenue growth. Walmart, on the other hand, needs to show investors it can restart its revenue growth; if it cannot, it is in trouble.

Disclosure: Your friendly neighborhood blogger owns shares of Kroger.