Kroger’s (NYSE:KR) impressive key fundamentals, ability to attract new customers, and smart management make it very appealing at this discounted price. The Kroger Company, one of the U.S.’s largest retail grocery chains, operates 2000+ supermarkets under various names throughout the South, Midwest, and West. At half of these locations Kroger has discount gas stations purposely operating at a loss to draw customers into their stores. KR also operates convenience stores and jewelry stores.
While Kroger’s food prices are not the lowest in the industry, this may be one of Kroger’s advantages. Other retailers are trying to slash prices in order to compete with giants. However, this is a losing game. Wal-Mart's (NYSE:WMT) buying power is so large it virtually makes competition impossible. Smaller retail supermarket chains will not be able to compete in a pricing war. Instead, Kroger is focusing its efforts on market share. The loss-leading gas stations draw value-seeking customers, especially when gas prices are higher. Kroger also has a highly specialized database, giving KR detailed information about KR's customer’s purchasing habits. This ability of management to look ahead, realize challenges, give an honest evaluation of what KR can and cannot achieve, and to act on it by taking bold moves like KR's loss-leading gas stations, reward cards, and store remodeling is the sign of great leadership at KR.
Key fundamental figures show that Kroger is doing well despite low operating margins. KR’s return on total capital is 11.5% vs. the industry average of 9.5%. KR's return on assets is near the top at 4.8%. These numbers show Kroger is using KR's assets wisely to generate returns, rather than spending energy bargaining suppliers for better prices. Kroger also has a growing dividend yield, currently at 2%. A buy price of $20.50 adds a margin of safety and is close to the bottom of its channel. It would be selling at 10.2x earnings, 3.8 points below its median PE of 14.0. This low beta, defensive stock may be a smart play for conservative, income-oriented investors.
Disclosure: I am long WMT.