The Kroger Co. (NYSE: KR)
Quality Value Investing Research Report | Updated Coverage | April 2024
Summary:
The Kroger Co. is a dividend-paying mid-cap food retailer that originated the supermarket model.
Despite above-average returns on equity, the company’s topline growth, net margins, and returns on invested capital are flat, and a competitive moat no longer surrounds it.
Nevertheless, Kroger’s stock remains at value prices due to market-underappreciated cash flows and below-average share price downside risks.
QVI maintains its coverage rating of Kroger in the Concentrated Real-Time Picks as a result of this updated research report.
When referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on April 9, 2024, and intended for illustration only.
The 46 holdings in the QVI Real-Time Stock Picks have collectively achieved alpha for 15 years by focusing research and analysis solely on a company’s current wealth and its share price’s present value. In other words, just the facts without unreliable predictive analysis typical of the buy side or the business modeling overkill of the sell side Wall Street analysts.
In this updated coverage QVI Research Report, we’ll reexamine the Concentrated Real-Time Stock Picks consumer staples sector holding, The Kroger Co., to see if it continues to meet Quality Value Investing’s investment criteria based on our checklist analysis of the business’s current wealth and its stock’s present value.
Kroger: Company Current Wealth
To uncover the company’s current wealth, QVI defines the value proposition, measures returns on management, and assesses enterprise downside risks.
Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including its economic moat.
The Kroger Co. KR 0.00%↑ is a dividend-paying mid-cap stock in the consumer staples sector’s food retail industry. It was added to the QVI Real-Time Stock Picks on February 18, 2020, at a cost basis of $27.28 a share, adjusted for splits and dividends.
The Kroger Co. operates as a food and drug retailer in the United States. The company operates combination food and drug stores, multi-department stores, marketplace stores, and price-impact warehouses.
Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce.
The multi-department stores provide apparel, home fashion and furnishings, outdoor living, electronics, automotive products, and toys.
The company’s marketplace stores offer full-service grocery, pharmacy, health and beauty care, and perishable goods, as well as general merchandise, including apparel, home goods, and toys.
The price-impact warehouse stores provide groceries, health and beauty care items, meat, dairy, baked goods, and fresh produce.
The Kroger Co. also manufactures and processes food products for sale in its supermarkets and online and sells fuel through fuel centers. The company was founded in 1883 and is based in Cincinnati, Ohio, USA.
Economic Moat
Alpha-rich investors target companies with clear competitive advantages from their products or services. An investor can streamline an enterprise’s value proposition with an economic moat assignment of wide, narrow, or none.
For example, Morningstar assigns The Kroger Co. a moat rating of none, downgraded from narrow due to concerns about its durable competitive advantages.
QVI’s value proposition elevator pitch for The Kroger Co.:
Kroger originated the supermarket model and now leverages its experience and scale to outperform direct competitors, the non-cyclical consumer sector, and the broader stock market.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit The Kroger Co.’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for The Kroger Co.: Neutral.
Returns on Management
QVI Research Report’s returns on management or fundamentals section measures the performance strength of the company’s senior executives by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, The Kroger Co.’s trailing three-year annualized revenue growth was mid-single-digits but slightly outperformed the consumer staples sector’s +3.30% median growth. Notably, the company’s topline growth tempered to +1.20% for the most recently reported twelve months.
Farther down the income statement, Kroger’s three-year, low-single-digit net profit margin underperformed the sector’s median net margin of +5.04%.
Returns on Equity and Invested Capital
Kroger’s senior management produced a three-year double-digit return on equity, or ROE, above QVI’s targeted threshold and the sector’s median ROE of +11.32%.
Stock buyback programs often elevate ROE. However, Kroger paused its share repurchase program in 2023 to prioritize de-leveraging following the proposed merger with Albertsons Companies ($ACI).
Kroger’s three-year return on invested capital, or ROIC, was below QVI’s threshold but ahead of the sector’s median ROIC of +6.63%. In addition, Kroger’s ROIC exceeded, albeit slightly, its weighted average cost of capital, or WACC, of 6.71%, demonstrating that its senior executives are average capital allocators of late. (Source of WACC: GuruFocus)
QVI’s business fundamentals rating for The Kroger Co.: Neutral.
Next, we’ll look at the company’s returns on management chart, enterprise downsize risks, the stock price’s present value, share price downside risks, and the investment thesis, each exclusive to Quality Value Investing’s premium (paying) subscribers.
Disclosure: At the time of this writing, I/we had a beneficial long position in the common shares of KR in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this post.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.