- Kroger has become the second-largest U.S. retailer through accretion.
- Kroger operates under dozens of names around the country.
- Will Whole Foods be its next target?
Kroger (NYSE:KR) is the most misunderstood retail company in America. They like it that way.
That’s because it’s not just Kroger grocery stores. Ralph’s in California is Kroger. Fred Meyer in Portland is Kroger. Harris-Teeter in North Carolina is Kroger. So is Dillon’s in Kansas. Starting next year, Mariano’s in Chicago will be Kroger as well.
Kroger operates gas stations, jewelry stores, and department stores as well as grocery stores. It even owns The Little Clinic, a chain of walk-in doctors’ clinics in some of its South and Midwest stores.
Kroger has grown slowly over 60 years, through accretion, buying local store brands and, usually, maintaining them. It’s the way Federated Department Stores grew for decades, until it re-branded all its local outlets and became Macy's (NYSE:M). Kroger, like Macy’s, is based in Cincinnati.
This has let Kroger grow into a giant, under the radar. Revenues were $108 billion for the year ending in January, with net income of $1.73 billion, $1.74 per share. It’s now the second-largest U.S. retailer, behind only Walmart (NYSE:WMT).
Kroger was “discovered” by investors in early 2013, and the stock gained 153% in the next two years. Gains this year have been more modest, just 16%, but there’s been a 2:1 stock split, and the quarterly dividend is now 11 cents/share, which will yield 1.18% in the next year at the current stock price of $37.17.
Kroger is not an entrepreneurial company, although it gets managers along with its stores. Until this year, for instance, the chairman was David Dillon, whose family owned Dillon’s. The CEO now is Rodney McMullen, a number’s guy and Kroger lifer who started as a stock boy while in college, and is given credit for the Fred Meyer acquisition.
Kroger’s biggest problem may be finding good stores to buy. Roundy’s is a typical Kroger deal. The shopping centers where its Roundy’s and Mariano’s stores sit are highly prized, the stores have a reputation as good local operators. The same was true with Harris-Teeter, acquired in 2014. The company tends to swoop in when top managers age, or run into difficulties that look huge to them but are small to a company of Kroger’s size.
If I were to look into Kroger crystal ball, I’d see it buying more into the fresh, wholesome trade, perhaps by buying The Fresh Market (NASDAQ:TFM), worth $1.14 billion but down 40% this year, or even Whole Foods Market (NASDAQ:WFM), worth $10 billion but also down 40%. The company’s groceries have been increasing their fresh vegetable sections, but management might still like the high-income demographics of those smaller players.
A Whole Foods acquisition would seem like a very big deal. Until last year Whole Foods seemed a real threat, and its management still sells the story that it’s a growth company. But that growth is slowing, CEO John Mackey is 61, and it may be time.
If something like that happens, look for Kroger Stock to become exciting all of a sudden. But the company won’t rush things. It will lie in the weeds, and wait for acquisitions to come to it. You can wait with it for a small profit, or watch it pounce and see a big profit pass by you.