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In the wake of rising volatility and increased competition in the food retailing sector, Kroger (KR) has performed well, but has not experienced the tremendous growth that its niche rivals Whole Foods Market (WFM) and The Fresh Market (TFM) have. In large part this is because:

  • Whole Foods and The Fresh Market have not solidified their position throughout America and thus are entering new markets and are producing explosive growth through substantive growth in location count.
  • The sector of "specialty food-retailing" is growing at a higher rate than that of "traditional supermarkets" and thus Whole Foods and The Fresh Market are attracting a new segment of the market who are willing to make the trip to experience what the two retailers have to offer.

For Kroger though, this does not mark an inevitable weakness. In the company's most recent quarter (Q3 FY12), the company reported a 3.2% increase in identical store sales along with an increase of its EPS guidance to $2.44-$2.66 from a previous EPS estimate of $2.35-$2.42. Kroger CEO David Dillon states:

Kroger achieved our growth objectives for the quarter, including positive identical supermarket sales, operating profit growth and outstanding tonnage growth. This quarter illustrates that the strength of our core business positions Kroger to accelerate our earnings per share growth... Kroger's proven Customer 1st Strategy continues to increase customer loyalty, identical supermarket sales and market share. With that foundation firmly in place, we are focused on deploying capital to further accelerate growth and improve ROIC. We are committed to delivering shareholder value through stronger earnings per share growth, higher dividends and stock buybacks.

This places Kroger in a very different position than its smaller rivals Whole Foods and The Fresh Market. Through having over 2,400 locations in 31 states, the company is well represented throughout the nation and has one strategic advantage that neither of its smaller (and hotter) rivals have: an expansive array of locations that will allow Kroger to meet the needs of its customers and adapt to take on its rivals, big and small.

Fundamental Strength

The world of food retail has become more and more difficult as time has gone on due to the rising competition in the sector. Companies from Wal-Mart (WMT) to Walgreens (WAG) compete on some level with Kroger and have thus expanded the sector beyond the traditional supermarkets of yesterday. As illustrated by Kroger's past quarter, the company is performing well even with this rising competition and this comes down to the company's apparent ability to adapt with the changing times in food retailing. The growth that Dillon speaks of will come through both new locations, but also investments into current stores that make the difference between a Kroger and a Whole Foods less substantive. The reason that Kroger holds this advantage more than some other large food retailers like Safeway (SWY) is because Kroger has outperformed them due to its ability to adapt. This places Kroger at an advantage to Whole Foods and The Fresh Market in its ability to change its current stores into being more competitive with the niche placers in the industry - ultimately giving customers less of a reason to make the extra trip to the specialty stores.

Valuation

From a company valuation perspective, Kroger is far cheaper than its smaller rivals in large part because it is a less "hot" stock in the marketplace and represents a lower growth ratio. This is reflected in nearly all metrics.

Forward Price Earnings: 9.78

  • Whole Foods: 26.14
  • The Fresh Markets: 28.24

PEG Ratio: 1.11

  • Whole Foods: 1.89
  • The Fresh Markets: 1.58

EV/EBIDA: 5.28

  • Whole Foods: 14.62%
  • The Fresh Markets: 16.08

Yield: 2.3%

  • Whole Foods: .9%
  • The Fresh Markets: 0%

For investors, this marks a lower valuation in the face of a more traditional company. Though traditional in nature, Kroger has the strategic advantage of its location base that is unparalleled in the industry. This places Kroger in a position to continue to drive incremental sales and increase earnings.

Conclusion

The fact that Kroger has a network of over 2,400 locations across the United States places the company at a strategic advantage against its smaller rivals due to its ability to adapt its current stores to meet the needs of customers who might otherwise go to Whole Foods, The Fresh Market, or another specialty food-retailer. For investors, this marks a company that has proven for 36 straight quarters that it can grow identical supermarket sales through continuing to innovate and use its strategic advantage: its location base.

Source: Kroger's Strategic Advantage Over Whole Foods Market And The Fresh Market