Kroger & Wal-Mart: Falling Prices and Rising Profits

It is no secret that the American consumer is pinched for cash in light of inflationary pressures, leaving them frustrated and even angry whenever they need to go to the store to purchase a good or service, or even just fill up their tank. It remains true, though, that consumers still have their needs and are very much still purchasing products and services, albeit in a thriftier manner.

 

Believe it or not, some companies offering an array of daily necessities are still making money, and even adding to profits by jumping at the opportunity to give consumers increased offerings, but at a price they can afford. In such a difficult environment, businesses that offer products of value are a very rare type of Company that can be relied upon in the current economy. 

 

Take Kroger (KR) for instance, the supermarket giant that owns such stores as Ralph's, King Soopers, Fred Meyer, and of course its namesake grocers, holds a vast, expansive nationwide network of stores and works with an equally large supply chain. As such, Kroger benefits from economies of scale when it stocks its shelves; it also owns its own brand names that are even cheaper to supply (and sell).

 

With commodities such as corn and wheat having more than doubled over the past year, Kroger's money efficient supply chain gives it excellent leverage over the competition to hold the line on product prices and gain market share as a result. Similar to other supermarket chains, Kroger has had to raise its prices somewhat, but compared to its peers, it has remained a price leader. As result, the Company has sacrificed a portion of its profit margins, but let's face it, everybody is wrestling with margin problems and this is a worthwhile tradeoff for the additional sales volume it has picked up by providing obviously less expensive merchandise that steals customers from the competition.

 

Comparable store (stores open longer than 12 months) sales were 5.8% higher during its fiscal first quarter 2008; management estimates 55% of that growth stemmed from higher traffic volume while the other 45% resulted from a larger average ticket. The rise in average tickets can be partially associated with the idea that consumers are less willing to go to restaurants in an effort to save cash, which instead leads them to buy in bulk at grocery stores.

 

During its first quarter, the Company's earnings of $0.58 per share blew away the $0.55 per share consensus estimate as well as last year's $0.47 per share result on revenue growth of 11.5% to $23.1 billion, which beat the consensus estimate by $800 million. These feats were all accomplished during an exhaustive store remodeling campaign that is yielding higher expenses. As the company completes its store upgrades over the next year or so and the associated expenses are reduced, it should only continue to improve its profitability, thus making Kroger a great long term investment.

 

Another such example is America's favorite store: Wal-Mart (WMT). The Company needs no introduction.  For everything from groceries to tennis shoes, Wal-Mart offers customers bargains. With net sales increasing 10.2% year over year and profit growing to $0.76 per share from $0.68 per share in 1Q08 the company is running on all cylinders.

 

With sales growing quickly, the Company managed to keep its inventory flat compared last year, demonstrating the power management has over its suppliers.  This tight control of inventory helped to reduce the panic markdowns evidenced elsewhere in the retail sector, and ultimately helped to expand the gross margin by 27 basis points year over year. The uncertain macroeconomic backdrop and the Company's fundamental strength may both contribute to solid earnings going forward.

 

For all you investors out there that are reluctant to pull the trigger, remember that there are still strong businesses worth investing in, but you just have to pick your spots.

Written by David Urani a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the homebuilding, staffing, medical devices, and logistical services industries

Disclosure: None

Comments

[Football Geek:]

I was thinking of selling some my shares after it touched almost
$60 the other day, but did'nt. It's hard to knock a company that
does well when the general economy has slowed down. We are
far from hard times, but people are spending less. WMT makes
money, and what's wrong with that.
The shares have had a good run since last summer, but
something keeps telling me that they could break thru the
$60 level. Will people continue to shop WMT after the
economy recovers ... Yes. So if they do well in good times and bad
then why sell.

2008 Jul 11 12:07 AM