Why Kroger Stock Will Outperform Target And Wal-Mart Stocks

  • Kroger has a large untapped geographical area inside the United States.
  • Superior same stores sales growth through Customer 1st policy.
  • Continued margin growth with strength in private label products.

Kroger stock has been on a phenomenal run since 2013 easily out performing the S&P 500 and it's peers. Though Kroger stock is trading at a much higher earnings multiple than Wal-Mart, the stock will likely continue to outperform the broader market and it's nearest stock peers like Target and Wal-Mart. A large untapped geographical market in the U.S., continued same store sales growth with the customer first policy and increasing margins leave Kroger stock with plenty of room to move higher.

KR stock chart

Kroger stock price vs Walmart and Target stock by amigobulls.com

Untapped Geographical Area In The U.S.

Target and Wal-Mart have largely saturated in the United States. Outside of major cities, both retailers have numerous stores in almost all major metropolitan areas. The first map below shows all current Wal-Mart Stores in the United States and the second map shows all current Target stores.


US Wal-Mart Stores

US Target Stores


Target and especially Wal-Mart have already conquered all the areas with the major populations. The map below shows all stores owned by Kroger including Harris Teeters, Fred Meyer and all banners in the Kroger family.
US Kroger Family Stores
US Kroger Family Stores

Unlike Wal-Mart and Target, Kroger has not yet reached the northeastern United States where 18% of Americans live. Kroger has a significant untapped geographical market for future growth.

Same-Store Sales Growth

Same-Store Sales Growth (SSSG) or comparable sales growth is one of the most important metrics for physical retailers. Comparing SSSG with competitors will show which retailers are gaining market share the quickest. Kroger has been growing same store sales much faster than Target or Wal-Mart. For the past five quarters, Kroger has grown comparable sales (% growth) faster than Target and Wal-Mart combined.

Same Store Sales Comparison
Same Store Sales Comparison

Why is Kroger increasing the top line so much faster than it's peers?

In the late 1990's, former Kroger CEO David Dillon launched the company's Customer 1st Strategy. As Wal-Mart began selling groceries to bring in customers, Kroger decided to differentiate itself by offering a customers a wider product selection and better shopping experience. Kroger's recent entry into craft beer is a good example.

Craft beer sales in the United State have continually increased by double digits and its market share is now estimated to be 11%. As part of the Customer 1st Strategy, Kroger now sells craft beer at numerous locations and is increasing it's availability. Kroger's Jason Milburn states that by offering craft beer, they give "customers a great experience in store". Neither Target nor Wal-Mart currently sell craft beer. This differentiating factor, the Customer 1st Strategy as exemplified with craft beer, is leading to superior same stores same sales growth.

Please note Kroger's sale store sales numbers above do not include fuel sales.

Kroger Profit Margin Growth

Kroger's Customer 1st Strategy is not only increasing top line sales but also margins. Sales of private label products have significantly higher margins for retailers than sales of name brand goods. According to the Food Marketing Institute, retailers earn a 35% margin on private label sales and only a 28% margin on name brand sales.

Kroger offers customers a wide selection of private label products including Simple Truth, HemisFares, Private Selection and others. Simple Truth may now be the world's largest organic food brand with over $1 billion in annual sales. HemisFares, the company's newest private label, is so popular that the supply chain cannot meet demand.

Kroger's success in private label sales can be seen with it's improving gross margin. Not only has the company been increasing revenue, it also increasing the profits earned on each dollar of revenue. In Q3 2015, gasoline prices were significantly lowers than year ago. This is why the year over year revenue declined.

Kroger Margin Growth
Kroger Margin Growth


Kroger stock has been on a magnificent run the past three years. While many investors may think the ride is over, I do not. A large untapped geographical market, a Customer 1st Strategy that is increasing sales faster than Wal-Mart and Target combined and increasing margins through private label sales leave a bright future for Kroger and Kroger's share price.

Harshal Patel Harshal Patel   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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