Kroger (KR) rarely receives attention in investment circles without mention of its competition. And since the completion of the merger of Whole Foods with (AMZN), investors have sold KR stock in the face of the threat.

Despite competition and the decline of traditional grocery stores, Kroger maintains a large presence. The grocer will have to leverage this presence and current strength to remain a major player in the grocery industry.

However, that is easier said than done. The company faced a challenging June 2017 earnings report, where it reported lower earnings guidance and KR stock lost over one-sixth of its value as a result. One day after announcing lower earnings guidance, Amazon and Whole Foods announced their merger, sending it further downward. The stock lost about one-third of its value in two trading days.

KR Stock: Competition on Multiple Fronts

Visible signs of intense competition in the grocery space are everywhere for Kroger. Upscale grocers such as Amazon/Whole Foods and Costco Wholesale (COST) are only one type of threat, as Kroger also competes with bargain grocers such as Aldi and niche stores like Trader Joe’s, in addition to regional grocers.

Since the 1990’s, KR also faced competition from discount retailers, namely Target (TGT) and Wal-Mart Stores (WMT). Walmart is the only company to have a greater market share in the grocery business than Kroger.

Yet Kroger has thrived in one area where it receives little attention — survival. The heyday of traditional grocery stores occurred in the 1980’s and 1990’s. In the 1990’s, Walmart transformed the industry by introducing supercenters that offered full grocery stores. Walmart eventually became the nation’s largest grocer with this strategy. However, Kroger became the second largest as other traditional grocers declined.

Kroger Knows How to Redefine Itself

Arguably, Kroger transformed the traditional grocery store into a successful niche of its own. Today, it is one of the few remaining traditional grocery stores with a nationwide presence. It outperforms the only other nationwide traditional grocery store, Albertson’s, in both store numbers and sales.

Kroger stock also trades at a price-to-earnings ratio of about 12.5. That P/E stands at about half of the industry average. Its P/E also remains well below that of Walmart, Costco and Amazon, and its P/E is close to where it traded during the 2007-09 financial crisis.

Moreover, KR stock has enjoyed a long track record of dividend increases, even during the last financial crisis. It remains one of the few U.S. corporations to have increased its dividend each year for longer than ten years. Its current dividend stands at 50 cents per share, a yield of approximately 2.4%.

Here’s How Kroger Stock Can Make a Comeback

What KR stock appears to need is a catalyst to stop and reverse the relentless selling trend. One option is to go bigger with its online grocery business, ClickList. Out of approximately 2,700 stores, Kroger had only expanded ClickList to 640 stores as of the end of fiscal 2017. The combined threat of Amazon’s in-store and online business is now a reality. ClickList needs to be available in all large and midsize metros as soon as possible to keep Kroger competitive.

Additionally, its current dividend and fiscal 2017 earnings amount to a payout ratio of just under 25%. This payout ratio gives Kroger plenty of room to increase its dividend enough to gain the attention of prospective investors. Also, in its June 2017 earnings announcement, the company announced a dividend increase of 4.2%. Its average dividend increase since 2006 has been over 13%. An additional dividend increase could invigorate investor confidence.

Micron Technology, Inc. (MU) Stock: Red Hot and It Could Get Even Hotter
Kroger stock needs to revitalize itself in the face of intense competition and management must maintain investor confidence.

Although the company has a long track record of adapting successfully to threats, the aggressive push by Amazon has pushed KR stock’s P/E near decade lows. A low P/E and a higher-than-average dividend yield make Kroger stock an attractive investment.

Nonetheless, KR must go big online and stay the course on the investment front to remain a large player in today’s grocery business.

As of this writing, Will Healy did not hold a position in any of the aforementioned securities.

This article was publishe on at:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s