A Few Reasons Why Kroger Is A Solid Long-Term Investment

| About: Kroger Co. (KR)


Focus on customer-centric strategies and innovation will drive results for Kroger.

Kroger's integration of Harris Teeter is progressing well, allowing the company to cut product prices without hurting the bottom line.

Kroger's attractive valuation, solid dividend yield, and impressive cash flow are some more reasons to consider this stock.

Consumer confidence in the U.S. is improving. According to the Conference Board, consumer confidence in the U.S improved to 90.9 in July from 86.4 in June, the highest since October 2007. This is a positive indicator for supermarket stores such as Kroger (NYSE:KR). In fact, Kroger seems to be already benefiting from improving consumer confidence this year. Its shares have gained an impressive 25% this year, driven by robust revenue and earnings growth.

Strong strategies driving results

Kroger had reported solid results for the first quarter, posting a 10% jump in revenue and a 4% rise in earnings. The company's Customer First strategy is proving to be a solid growth driver, and seems to have accelerated its growth plan. Moreover, it is no surprise that Kroger is seeing strong positive indicators in customers' shopping behavior.

An improving consumer confidence shows that the economy is recovering, even though it is still in the early stages of its turnaround. Kroger is looking to use this to its advantage to enhance its connection with customers, driven by its customer-focused approach. Moreover, management is confident that Kroger is "uniquely positioned" to deliver growth in any economic environment. A look at the company's strategies and business developments will make it clear why Kroger looks like a solid bet for the long run.

Kroger is seeing an increase in loyal households at a greater pace than overall household growth. Although cost inflation has increased considerably in several areas, including grocery, meat, produce, and pharmacy, Kroger has held its own. In addition, Kroger's merger with Harris Teeter has been a positive driver for the company, and as the culture at both firms is matching, integration is proceeding smoothly.

Kroger bought Harris Teeter for $2.5 billion in January, and it is now cutting prices across thousands of items at Harris Teeter stores. The good thing is that Kroger is cutting prices without taking a hit to the margins, as the reductions are being funded by cost savings arising out of the deal. According to Kroger, the acquisition synergies can lead to savings of $40 million-$50 million a year. Hence, Kroger has made a smart move with this acquisition.

Customer-centric strategies

Moreover, Kroger is continuously focusing on a strategy known as Customer-First innovation, which it believes is the key driver of its sustainable growth. Under this strategy, Kroger focuses one innovation every quarter, which enables it to improve its connection with customers. For example, Kroger's brand portfolio allows it to sell the right products at optimal price points. Also, it has introduced new branding and packaging for Value products.

Kroger has also altered the name of some of its products. In fresh products, it has replaced the name Kroger Value with Heritage Farm. It believes that the name change "better reflects the inherent quality of the brand and we are already seeing positive acceptance from our customers."

The company is also making technological modifications in its system, with a view to introduce the Internet of Things for retail. For example, it has incorporated interactive sensors in its store network that will further enhance the safety of its products. These initiatives save money and provide more time for its associates to engage with customers.

One minor concern and final words

However, there are certain concerns that investors need to take a note of. Kroger's financial results might be pressured by rising healthcare and pension costs, which is a company specific problem and is not prevalent in the entire industry. The company is currently negotiating new contracts with store associates in Cincinnati, New Mexico, Toledo, and certain regions of California. At the same time, it is also negotiating contracts with teamsters across its distribution and manufacturing facilities.

Apart from this particular concern, Kroger looks like a solid bet, especially considering its valuation metrics. Kroger trades at 17 times last year's earnings, while its forward P/E is less than 14. In addition, its operating cash flow over the past year has been strong at $3.5 billion. Kroger also pays an impressive dividend yield of 1.30%, and has a payout ratio of only 21%. As such, Kroger can increase the dividend going forward since it has strong cash flow and is reporting solid earnings growth.

Overall, Kroger's prospects look strong. Increasing consumer confidence, technology innovations, and its strong customer connection should continue driving results, making Kroger a solid pick.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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