Summary
- Even though it is a brick and mortar retailer, Kroger is a momentum stock.
- Kroger is now the third largest operator of gas stations in the United States.
- Kroger has managed to develop its natural foods private label, Simple Truth, into a $1 billion brand in less than two years.
- Kroger’s TTM revenue grew by $5.37 billion between July 2013 and July 2014.
- Kroger has made a serious entry into online retail by purchasing Vitacost.com.
The most interesting and exciting retail growth stock in America appears to be a 131-year-old grocer: Kroger (NYSE: KR). The nation's largest supermarket operator just cannot seem to stop growing and making more money.
Some of the impressive moves that Kroger has reported in recent months include:
- Opening 2,000 filling stations in 37 states. Kroger now operates fuel centers at 1,275 supermarkets and 725 convenience stores. That makes it the third largest operator of filling stations in the United States.
- Developing its private label line of natural foods, Simple Truth, into a $1 billion brand in less than two years, according to The Cincinnati Enquirer. Kroger's vice president of corporate brands, Gil Phipps, told attendees at the chain's investor event that Simple Truth sales grew by 30.7% in the first half of 2014. Kroger executives think that Simple Truth sales will double in volume in a few years.
- Reporting a TTM revenue of $103.88 billion on July 31, 2014. That is a $5.37 billion increase over July 31, 2013, when Kroger reported a TTM revenue of $98.51 billion. As I've noted elsewhere, Kroger's level of TTM revenue growth is similar to that of Costco Wholesale (NASDAQ:COST).
- Increasing its footprint in online retail by purchasing vitacost.com, an online marketplace for health foods, supplements, and organic foods for $280 million. Bloomberg reported that Vitacost generated $382.7 millionin revenue in 2013. Vitacost's website displays deep discounts of organic products like olive oil that rival those on Amazon.com. It looks like Kroger is going after a piece of Amazon.com's (NASDAQ: AMZN)business as well as Whole Foods Market's (NASDAQ: WFM) customer base.
- Developed a grocery app that is now one in the top 2% of apps downloaded from the Apple Store, according to Barron's.
- Added a click and pull feature to its app and website. Click and pull, or click and collect, allows customers to place a grocery order online and pick it up in the store. With click and collect, Kroger employees pull the order from the shelves and buy it. The customer that ordered online simply picks it up. Kroger got the click and pull capability by purchasing Harris Teeter, a chain of supermarkets based in North Carolina.
Click and collect could give Kroger a new source of revenue because customers pay an added fee for it. Harris Teeter customers pay $4.95 for a standalone grocery order. Customers can also subscribe to the service for $16.95 a month or $99.95 a year.
This service will help Kroger compete with Walmart's similar offering, Walmart to Go, and lure higher income customers away from Whole Foods with an added level of convenience. Currently, Kroger is planning to test the service on its home turf in Cincinnati before rolling it out nationwide. The service is also being tested at the Bear Valley location of King Soopers (Kroger's Denver-area subsidiary).
The click and pull capacity will enhance Kroger's already impressive online delivery option: Home Shop. Like Home Shop, the store pickup option for online orders leverages Kroger's existing stores. Instead of building fulfillment centers for delivery, Kroger uses existing stores and employees to service orders, allowing it to increase business without capital expenditures.
Is Kroger Now a Momentum Stock?
Kroger's growth has translated into some impressive financial numbers, including a quarterly gross profit margin of 20.44%, a quarterly profit margin of 1.37%, a dividend yield of 1.35%, a free cash flow of $353 million, a return on equity of 31.44%, and a net income of $1.569 billion.
The big question we need to ask ourselves is how long can Kroger keep growing? Like Costco, Kroger has been growing by taking customers from less agile and less sophisticated competitors. Is there a limit to the number of customers that Kroger can poach from rivals like Wal-Mart Stores Inc. (NSYE: WMT) and Safeway (NYSE: SWY)? Not to mention all the business it has stolen from dollar store operators and regional grocers.
That's hard to say because Kroger seems to have become a momentum stock. Like Amazon.com and Wal-Mart, its growth is driven by momentum; if the momentum stops, so does the growth. Actually, it's a sort of vicious cycle-momentum drives growth, and growth drives momentum; if either stops, it ends.
As at Amazon.com, the momentum and growth at Kroger is driven by innovation and acquisition. Amazon.com's momentum was generated by a long series of technological and business innovations that allowed it to lower costs and increase convenience. Kroger has adopted a similar strategy but, as recent events at Amazon.com have shown, that cannot last forever.
How Long Can Kroger's Momentum Continue?
Like any other momentum company, Kroger faces two dangers: The first is that the new initiatives will not deliver the required level of growth. The second is that competitors will figure out how to duplicate those capabilities and offer similar services and prices.
That is part of Kroger's success: it is growing because it managed to match Wal-Mart's ability to discount. More people are shopping at Kroger because they know it offers some of the cheapest prices in town. Kroger has also figured out how to make shopping more convenient, largely by offering one-stop shopping for gas, prescriptions, groceries, and household products. Unfortunately, that's a business model that rivals like Safeway, Costco, and Wal-Mart can easily duplicate.
It'll be interesting to see how long Kroger's winning streak and momentum can continue. If it can, Kroger could be a growth stock for years to come.
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