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About Kroger

The grocery space is quite akin to the restaurant space for a few different reasons.

For starters, there is food involved, which to us is the best commonality as there is a lot of good food out there but also, from a more investment-centered perspective, food is widely deemed as a necessity, regardless of the current state or stage of the cycle the economy is in.

Additionally, it can also be noted that the restaurant and grocery industries are well known for their razor-thin margins.

Yay.

There are pros and cons with just about everything in life and the pros and cons of being a shareholder in a company in one or both of these spaces clearly presents no exceptions.

Being in the great state of Texas, we at MacroHint have received our fair dosage of Kroger, as there are many of the company’s stores in and around the region. 

In fact, when the famous Texas freeze struck, members of MacroHint’s founding team escaped the region where they were living at the time in search of some temporary relief in a town a few miles away and eventually found themselves looking to stock up at a Kroger.

While initially hopeful that there would be some essentials such as toiletries as well as some snacks and other groceries to temporarily tide ourselves over, we were unpleasantly greeted by bare shelves, filled aisles and reduced store hours.

It was truly a sight to see.

That’s not to imply that all of our experiences at Kroger have been negative, as many of them were just as expected, but nevertheless we will always have a vivid memory of Kroger, especially given the aforementioned circumstances.

It should be mentioned that oddly enough, Kroger isn’t just Kroger.

What we mean is, Kroger doesn’t just merely operate one grocery chain under the name of Kroger, but the company is home to a whole host of other branded grocery chains around the United States, not to mention the fact that the company is, at the time of this publication, in the process of looking to acquire one of its larger grocery competitors, Albertsons.

Regardless of whether or not the proposed acquisition successfully closes, Kroger currently owns grocery chains such as Dillons, Food 4 Less, Fry’s, Mariano’s, QFC, Ralphs, Metro Market among a few other noteworthy regional chains, which is just a little known fact about Kroger and speaks instantly to its market share.

If you got nothing out of any of the content above, just know that Kroger is a leading supermarket in the United States, apparently one of the largest in terms of revenue, budding up against one of its largest, most threatening competitors, Walmart.

Now, let’s take a deeper dive into Kroger’s financials and ultimately try to put together some facts and trends in hopes of figuring out whether or not this company’s stock is worth considering as a long-term investment.

Kroger’s stock financials

Kroger’s stock (NYSE: KR) is presently trading at a share price of around $45 with a market capitalization of $32.07 billion, a prevailing price-to-earnings (P/E) ratio of 13.85 and also distributes an annual dividend of $1.04 to its shareholder base.

From our lens, this is a great start for Kroger and its stock as its share price appears to be undervalued given its P/E being modestly below 20, which by the way is considered to signal that a stock is trading exactly at fair value.

We are also general fans of companies that offer dividends and Kroger just happens to fall into that category.

Getting a little more familiar with the company’s financials, Kroger’s executive team is in charge of approximately $49 billion in total assets along with around $39.6 billion in total liabilities, according to TD Ameritrade’s platform.

We are certainly glad to see that this company’s total assets and total liabilities aren’t as close as we initially presumed them to be, especially given the low-margin, competitive, cost-intensive nature of the grocery space, not to mention the number that COVID-19 and supply chain-related impacts has done on Kroger and its industry’s peers.

Shifting gears over to the company’s income statement, Kroger’s total revenue over the last handful of years has been pretty much what we expected; consistent and massive.

Specifically, Kroger’s total revenue in 2018 stood at nearly $122.7 billion, staying relatively flat for the next few years up to its latest reported figure of nearly $138 billion, in 2022.

This sizable growth in revenue over the last five years can most likely be attributed to both physical store growth across the country, regional and national growth as it relates to Kroger’s digital delivery offerings (and partnerships with companies such as Instacart) and the increase in prices imposed on consumers through this rough inflationary season.

On the basis of the company’s cash flow statement, Kroger has been able to churn out consistently positive net income during the same time frame and has also experienced some general growth in its total cash from operations. For instance, the company’s total cash from operations stood at around $3.4 billion in 2018 and has since extended up to approximately $6.2 billion as of its latest report, according to TD Ameritrade’s platform, in 2022.

Especially in the current and short-term future inflationary environments, it is incredibly important for the company to be able to produce as much cash as possible.

Again, it’s just the nature of the grocery business.

Kroger’s stock fundamentals

Did we happen to heavily insinuate that profit margins in the grocery space are usually far from exciting?

In comes Exhibit A, Kroger’s trailing twelve month (TTM) net profit margin.

Kroger’s TTM net profit margin is eerily similar to that of the industry’s average, as it currently sits at 1.62% to the industry’s average of 1.69%, according to TD Ameritrade’s platform.

Out of all of the instances where we said something to the extent of “this is pretty much what we had expected,” this metric definitely takes the cake, as the grocery business is, as we stated before, riddled with low margins and many expenses that eat into an organization’s gross profit like there’s no tomorrow.

Nevertheless, we are happy to see that Kroger is staying competitive from a net profit margin standpoint.

That’s not the only core metric that indicates that the company is staying competitive with its peers, as the company’s TTM returns on assets and investment are both negligibly close to the average of their peers.

As a reference, according to TD Ameritrade’s platform, Kroger’s TTM return on assets sits at 4.74% to the industry’s average of 5.27% and the company’s TTM return on investment isn’t all that different from the industry’s average as well.

Kroger has stayed competitive.

Should you buy Kroger stock?

Large-scale grocery operators and their stocks have their fair share of additional considerations, primarily on the cost side of things.

Nevertheless, it is our opinion that Kroger has an excellent operating base to launch off of given the state of its balance sheet, the consistency of its total revenue over the last few years, its competitive TTM net profit margin, its increasing digitization as it relates to its overall business model and its sheer footprint around the country.

A supplemental positive with this company is that, from our perspective, regardless of whether or not Kroger closes a deal with Albertsons, it certainly isn’t make-or-break nor does it materially change our views on the company and its prospects moving forward.

It would likely be a major plus in the long-term if the deal were to go through, however, even if the deal was never introduced as a possibility to begin with, we’d still be pretty bullish on Kroger and its stock.

All things considered, we are comfortable giving Kroger’s stock a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.