Kroger Eating Into Whole Foods’ Niche Market

  • Whole Foods once dominated the healthy eating market
  • Kroger is on to the game, and transforming itself to meet the trend
  • Kroger has caught up, and has the assets to pass its smaller rival
Kroger stock is a long play article image

It’s a lesson for trend-following investors.

The trend was healthy eating. So the play was Whole Foods Market (NASDAQ:WFM). Whole Foods, nicknamed “Whole Paycheck” by detractors, runs attractive, pricey food markets specializing in natural and organic products, with ample real estate devoted to pre-prepared meals.

In a famous 2010 New Yorker profile founder John Mackey marveled that he had been able to build the Austin, Texas-based business without competitors catching on.

Kroger Copies Whole Foods

Worse for Mackey is that Kroger (NYSE:KR), the enormous Cincinnati-based grocer that operates under many different names around the country, including Ralphs and Dillons, did. Kroger has been transforming its own stores over the last several years, adding more fresh fruit and vegetables, more pre-prepared meals, even Starbucks (NASDAQ:SBUX) coffee bars, and it is working.

Over the last year Kroger stock is up 35% while Whole Foods is down 16%. Whole Foods’ downturn accelerated earlier this year after it announced it would launch a new, lower-priced chain called 365, aimed at millennials, people who have come of age since the turn of the century. Millennials, it seems hate being called millennials, and they don’t like being pigeon-holed as poorer than their parents.

KR stock chart

Source: Kroger stock price data by amigobulls.com

Kroger reported Q2 2015 results before the market opened on September 11, and its upward trend continued. Net income came in at $433 million, 44 cents per share, on revenue of $25.54 billion, compared with net of $347 million, 35 cents a share, and revenues of $25.31 billion a year earlier.

With the pop of 6% in the pre-market on that news, to $37.75, Kroger is now within $2.50 of its all-time high set in early August, $39.24, which came after a two-for-one split in July. Its Price/Earnings has now caught up with Whole Foods’ 19.69.

Which is the better buy now?

Kroger had spectacular top-line growth for the year ending in January, going from $98.4 billion in sales to $108.5 billion. But Whole Foods’ performance, for the year ending last September, was similar, from $12.9 billion to $14.2 billion. More important, Whole Foods’ margin remains greater, as it took $579 million of that $14.2 billion in profit, about 4%, while Kroger earned $1.7 billion on its $108 billion, which comes to 1.5%. Even the yield on Whole Foods is better, a dividend of 13 cents yielding 1.57%, against 10 cents yielding 1.19% for Kroger.

Three things tip the balance in Kroger’s favor. First, Whole Foods’ same-store sales continue to decelerate, and is now down to 4%. Second, 365 is not coming to the rescue. The company plans to offer only a half-dozen such stores next year, and many will go into “food deserts,” poor neighborhoods other stores avoid because of theft and poor results.

Kroger, meanwhile, has been getting stellar same-store sales growth – 5.75% last year. Third, its results have accelerated despite managing an executive transition with the retirement of long-time CEO Douglas Dillon. Whole Foods co-founder Mackey remains as co-CEO of that company. If a bus ran over him tomorrow the company would struggle. Kroger investors are safe from buses.

In the past, Kroger represented safety for investors while Whole Foods represented growth. Kroger now offers both, safety and growth. Kroger is the play.

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Comments on this article and KR stock

user profile picture
alexsimonelis
bullish
Good analysis.
1 reply
user profile picture
stockdissector
bullish
Hi Dana,

Great strategic analysis on Kroger and Whole Foods Market! I own shares in Whole Foods and I am disappointed in the company. I have grown wary of the entire retailing sector in recent years. Its a tough competitive sector. I didn't know that Whole Foods new 365 program insulted an entire demographic.

Good stuff!

William
1 reply
Do share this awesome post