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KR AT A GLANCE

P/E ► 81.4   EV/EBITDA ► 7.98   ROA ► 2.9%   ROE ► 3.3%   Debt to Equity ► 3.83   Current Ratio ► 0.922   Interest Coverage Ratio ► 2.50

 

 

 

 

The Kroger Co. (NYSE: KR) is the largest operator of traditional grocery stores in the United States and the second largest food retailer in the United States after Wal-Mart.^[1] Kroger sells food and other consumer goods in more than 2,481 supermarkets under 24 store brand names, including Kroger, Fred Meyer, Dillons, Food 4 Less, and Fry's.^[2] Kroger's has diversified operations to include jewelry, convenience stores, food and drug stores, amongst others. As of 2009, Kroger had also opened 781 fueling stores.^[1][3]

Over the last few decades, the supermarket industry has undergone a transformation in the United States. Twenty years ago, 90% of food shopping was conducted in traditional grocery stores. Today, just 50% of food shopping is done at traditional grocery stores. As a large retail grocer, Kroger faces competition from similar chains, local stores, and niche stores, such as Whole Foods Market (WFMI) and Safeway (SWY). Wal-Mart (WMT), however, represents the most significant long term threat to the firm's continued growth. Wal-Mart (WMT) sells a wide variety of goods ranging from apparel to groceries. Because of its scale, the retailer is often able to offer below-market prices to its customers. In order to compete, Kroger has focused on making its stores a one-stop solution for customers' daily needs.^[4] To this end, Kroger has greatly expanded its product offerings, introducing gas stations, jewelry stores, and even financial services to its primary supermarket outlets.^[5] As of February 2009, Kroger had opened 684 convenience stores and 385 fine jewelry stores in addition to its 2,481 supermarkets. ^[6]

Business Overview

KR Comparable Store Sales Growth^[7][8]

Kroger is the largest traditional supermarket operator in the United States. Kroger operates stores in 44 major markets across 31 states, and has the largest or second largest market share in 39 of those markets.^[9] Unlike other supermarket companies, like SuperValu (SVU), who rely predominantly on acquisitions to grow revenue, Kroger focuses on growing revenue through increasing identical store sales.

Business Financials

In 2008, Kroger posted $76 billion in revenue, an 8.2% increase from 2007. Most of the increase was due to higher identical store sales, which resulted from both a larger number of transactions and larger average transaction value.^[10] Kroger has had a 9% average annual growth rate since 2004, which it attributes to its investment in creating one-stop shopping locations to increase identical store sales. ^[11][12]

In the first three quarters of 2009, Kroger posted $58.2 billion in revenue, a 1.1% decrease compared to the same period of 2008. During the same period operating margins fell from 3.05% to 1.01% and net profit margins fell from 1.53% to -0.32%. Kroger attributed the declines in large part to falling retail fuel prices. The average retail price for a gallon of fuel sold at Kroger fuel stations was 24% lower in the third quarter of 2009 compared to the third quarter of 2008. In the first three quarters of 2009, comparable supermarket sales were 0.4% (versus 8.1% in the first three quarters of 2008); this figure was 1.7% (versus 5.9%) when fuel sales are excluded. In addition, supermarket sales were pressured in the third quarter of 2009 by decreased consumer spending, persistent deflation in food prices (especially in produce, meat, and dairy), and heightened competitive activity. ^[13] In December 2009, a food price index posted a 0.3% increase in its price basket-- the largest monthly increase in more than a year -- in a sign that deflation is easing in the U.S. If that trend holds, it may be good news for Kroger and the supermarket industry as a whole. The price index is still down 2.4% from a year earlier.^[14]

Business Segments

Although Kroger does not break-down sales per unit, the company operates five types of stores: combo stores, multi-department stores, price-impact warehouse stores, convenience stores, and jewelry stores.

• Combo Stores: The majority of Kroger's supermarkets are combo stores with a full selection of food and pharmacy products. They offer an array of food products, as well as specialty departments like bakeries, delis, and organic food sections. Of the combo format stores, 781 include fuel centers.^[5][6]

• Multi-Department Stores: Kroger operates a number of multi-department stores in the Pacific Northwest and Alaska under the banner Fred Meyer. In addition to groceries, these stores sell apparel, furnishings, electronics, automotive products, toys, and jewelry. They are larger in size than the combo stores and many also contain fuel centers.^[5][2]

• Marketplace Stores: Kroger operates marketplace stores in Arizona, Ohio, and Utah. These stores are smaller versions of its multi-department stores. The main difference is that marketplace stores don't contain apparel sections.^[5][2]

• Price-Impact Warehouses: Kroger's price-impact warehouses are the size of a combo store and offer a "no-frills, low cost" experience for grocery, along with health and beauty items. The company operates these stores in California, Illinois, and Nevada.^[5][2]

• Convenience Stores: Kroger operates 782 convenience stores in 15 states. Most stores are attached to fuel stations and offer an assortment of food choices, including Kroger's private label items.^[5][3]

• Jewelry stores: Kroger is the fourth largest fine jewelry retailer in the United States. The company operates 394 jewelry stores in 34 states. Of these, 123 are located in Kroger grocery stores and the remainder are located in shopping malls.^[5][3]

Quarterly Business Financials

In Q1 2009, Kroger had sales of $22.8 billion, a decrease of 1.3% from the prior year. Excluding fuel sales, sales increased 3.9% over the previous year. Net earnings in Q1 were $435.1 million and increase of 12.7% over the previous year. As of Q1 2009, Kroger operated in 2,475 stores within 31 states.^[16]

In Q2 2009, Kroger had sales of $17.7 billion, a decrease of 2% from the prior year's Q2. Kroger's net income for Q2 2009 was $254.4 million, a decrease of 8% since Q2 2008. Despite the decreases in revenue and net income, Kroger has increased its quarterly dividend by 5.6% to $0.095 per share from $0.09 a share.

In Q3 2009, Kroger had sales of $17.7 billion, an increase of 0.3% over Q3 2009. Kroger's net income for Q2 2009 was -$875 million.

Trends and forces

Private Label Trends

In order to increase its margins and compete against Wal-Mart's lower prices, Kroger continues to invest in its private labels. Kroger sells more than 14,000 private label products at its supermarkets and convenience stores.^[3] The company sells its private label items in three quality tier: private selection, banner brand, and value brand. Kroger is generally considered to have one of the most successful private-label products in the industry. More than 26% of Kroger's sales come from these items, which typically have higher margins and fuel customer loyalty. Kroger produces 43% of these products in its own 42 plants, while the rest are produced by third party manufacturers.^[5]

The Wal-Mart Effect

Wal-Mart is the greatest external force affecting any grocer. In markets that Wal-Mart has entered, grocery prices drop by an average of 10-15%.^[17] Additionally, Wal-Mart is able to drop grocery prices 10-30% drastically during promotional periods because it can remain profitable on extremely low margins due to its volume of sales.^[18] Although Kroger has introduced its price impact warehouse stores to compete with Wal-Mart (WMT) and other low cost competitors, its other stores may suffer from increased price competition.

Technology

In 2003, Kroger formed a joint venture with London based data management and analytic company dunnhumby to create dunnhumby USA. With dunnhumby's technology, Kroger can analyze a tremendous amount of information about its customers.^[19] Kroger is utilizing that knowledge to design its stores to match the needs of local markets. For instance, some of Kroger's supermarkets now have office supply stores built inside them. Kroger also used dunnhumby's data to build Kroger Personal Finance, which offers home equity loans and mortgages at some Kroger locations. Analysts partly credit dunnhumby for boosting Kroger's sales per square foot, which have risen 20% since 2003.^[20]

Gas prices

Since 631 of Kroger's supermarkets and most of the company's 779 convenience stores sell gasoline, the company's results can vary depending on the price of oil. In Q3 2009, Kroger attributed its net income loss primarily to falling oil prices.

Competition

Among traditional supermarket chains, Kroger has been able to use its own size to offer lower prices. In fact, despite the fierce competition, Kroger has increased its market share in most of its markets. In 2007, Kroger's market share increased by .65% in its 44 major markets.^[9]

In 2006, the most recent year for which data is available, US consumers spent a total of $1.1 trillion on food, 51.1% of it on groceries. ^[21] As a retail grocer, Kroger faces its stiffest competition several sources:

Wal-Mart Stores (WMT) Wal-Mart is the largest food retailer in the US with more than 3,550 stores and supercenters.^[22] Wal-Mart is able to provide low prices through its distribution network and economies of scale. Generally, Wal-Mart charges about 8% less than Kroger for the same products. Kroger stores cater to a similar broad public as Wal-Mart. Consumers turn to discount stores such as Wal-Mart when their disposable income falls.

Safeway (SWY) Safeway is the third largest food retailer and largest operator of traditional supermarkets in the US, with 1743 stores nationwide.^[23]

SuperValu (SVU) SuperValu is the third largest food retailer and second largest operator of tradition supermarkets int he US, with 2,200 stores nationwide.^[24]

References

1. ↑ ^{1.0 1.1 1.2} Kroger Co's Google Finance Profile Page
2. ↑ ^{2.0 2.1 2.2 2.3} KR 2007 10-K pg. 1  
3. ↑ ^{3.0 3.1 3.2 3.3} KR 2007 10-K pg. 2  
4. ↑ US: Kroger Q3 sales up, earnings dip.
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7} Kroger 2007 Fact Book.
6. ↑ ^{6.0 6.1 6.2} Kroger's 2008 Annual Report, Page A-6
7. ↑ KR 2007 10-K pg. 12  
8. ↑ KR 2006 10-K  
9. ↑ ^{9.0 9.1} KR 2007 10-K pg. 10  
10. ↑ KR 2007 10-K pg. 11  
11. ↑ KR 2007 10-K  
12. ↑ ^{12.0 12.1} 2008 Kroger Fact Book
13. ↑ 2009 10-Q 3rd Quarter 2009
14. ↑ [1]
15. ↑ 2009 10-Q 3rd Quarter 2009
16. ↑ KROGER REPORTS FIRST QUARTER 2009 RESULTS
17. ↑ [2] Ideas & Trends: Discount Nation; Is Wal-Mart Good for America? - New York Times
18. ↑ [3]Wal-Mart chops prices in bid to lure shoppers - CNN Money
19. ↑ What We Do.
20. ↑ Kroger's Secret Weapon.
21. ↑ [4]Food CPI, Prices, and Expenditures - US Economic Research Service
22. ↑ [5]Wikinvest Wal-Mart Article
23. ↑ Wikinvest Safeway Article.
24. ↑ SUPERVALU INC (New York Stock Exchange).
25. ↑ 2009 Safeway Factbook
26. ↑ 2009 SuperValu Annual Report
27. ↑ 2009 Walmart Annual Report