Subjective Market Values: Does Kroger Do Anything Well?

Headlines seem to be driving the market without considering past performance and investment fundamentals.
News that e-commerce giant is buying Whole Foods sent grocery stocks reeling. Kroger sank 14.5 percent, Supervalu plummeted 17 percent, Costco fell 7 percent, Sprouts Farmers skidded 12.7 percent, and United Natural Foods dropped more than 15 percent. Even discount retailers such as Target and Wal-Mart, as well as many consumer product companies also fell after the deal’s announcement.

Following the announcement, Amazon’s stock rose by 3 percent, as Whole Foods shares skyrocketed by 28 percent.

I was also surprised to find out that Amazon has been attempting grocery delivery since 2007, which means that for 10 years they have been in the grocery business, and have admitted struggles with success.

In no way is this meant to be investment advice, but I must ask: Why did the Amazon headline move the market so dramatically, and what is really occurring in the retail grocery marketplace?

I did some research.

I looked at Kroger to find answers as to why the market has predicted their demise. What I found out is that Kroger has done multiple things very well. Kroger has one of the best dividend and revenue growth track records. From FY2007 through FY2017, Kroger has raised its dividend each year, and has had YOY revenue growth. Most companies can only dream of this type of consistency.

According to a March 2017 Bizjournal article, Barclays investment analyst Karen Short said that Whole Foods is likely losing customers to a number of competitors, but the largest winner is Kroger, because it has clearly gained share in natural and organic food products. In fact, Kroger’s natural and organic product sales in fiscal 2016, which ended in January, hit $16 billion. That topped Whole Foods’ total sales of $15.8 billion over the past 12 months.

With nearly $120 billion in sales, Kroger is the 2nd largest U.S. retailer, according to the National Retail Foundation. Kroger also has 40,000 items available through its ClickList home delivery service.

I was also surprised to find out that Amazon has been attempting grocery delivery since 2007, which means that for 10 years they have been in the grocery business, and have admitted struggles with success.

Is there new competition?

Yes; German Grocery Chain Lidl plans to have at least 100 locations in United States by next summer, and could expand to more than 500 locations over the next five years, according to analyst estimates. Its initial stores are opening in competitive grocery markets, right on top of rivals’ locations. Aldi grocery chain recently announced plans to add an additional 900 locations over the next five years, and it is spending $1.6 billion to remodel 1,300 of its existing stores. The German discounters have battled across Europe for years, stealing sales from traditional grocers as consumers get accustomed to their private-label products. (The German grocery giant, Aldi Nord, also runs Trader Joe’s.)

Competition and price wars is not a failed strategy by Kroger. Kroger cannot control what the competition does, and now is a time of rampant food deflation in the U.S., with falling prices already ravaging grocers’ earnings. I believe that Kroger has the scale to fight the price war, but other smaller chains could be in trouble. The rational for the large stock price hit is not warranted versus the execution of strategy which Kroger has implemented.

The competitive threats and scenarios mentioned are certainly a nuisance to Kroger, however, I view it as a momentary blip on the competitive landscape which Kroger has faced during its 130-year existence. Their strategies over the past decade have resulted in Kroger advancing and growing well beyond any of its competitors. Some cases, such as the failed Supervalu experiment in buying Albertsons, have really shown just how well Kroger can acquire, compete, and win.

Analysts are enamored with the movements of Amazon, and always want to predict the extreme negative consequences on their competitors. They need to look more closely at the winners over the last 130 years, and not the newcomers who are yet to demonstrate that they have the staying power to be a leader in the future. Kroger’s strong operational and fiscal position will win out, and once again they will return to being a darling of Wall Street investors.