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Stock Spotlight

At Kroger, growth is always in stock

Since Barney Kroger invested his life savings, $372, to open a grocery store in the late 1800s, Kroger ($35; KR) has grown into a chain of 2,400 supermarkets in the U.S. operating under two dozen different names.

Nearly half of its stores pair with gasoline stations, while many are supercenters offering general merchandise, such as apparel and electronics. Through subsidiaries, Kroger also operates more than 780 convenience stores and 320 jewelry stores.

Kroger’s sales have increased in 26 consecutive years, helped by modest inflation, a handful of acquisitions, and steady organic expansion. Scoring above 80 in five of six Quadrix categories, Kroger earns an Overall score of 97, while both sector-specific scores exceed 95. Kroger is a Focus List Buy and a Long-Term Buy.

Business breakdown

Name-brand products share shelf space with Kroger’s corporate brands (about 26% of grocery sales). Unlike most grocers, Kroger manufactures about 40% of the products sold under its own brand. The company separates its products into four main groups: nonperishable (50% of total revenue in the year ended January), perishable (21%), fuel (20%), and pharmacy (8%).

All these groups have grown sales in each of the past three years, though none faster than fuel, up 111% from fiscal 2010. However, fuel sales have contributed to the decline in Kroger’s gross profit margins, down for three straight years. Operating margins widened last year.

Increased use of generic drugs has pressured Kroger’s pharmacy sales, but growth in prescriptions filled remains strong. Kroger is pushing further into health care, last year acquiring Axium Pharmacy Holdings, which offers specialty drugs and support services to patients with cancer, multiple sclerosis, and other chronic diseases.

By steadily taking market share from rivals, Kroger’s grocery business now ranks first or second in 38 of the 42 major markets where it operates. Same-store sales, excluding fuel, have risen for 37 straight quarters.

Kroger targets 2.5% to 3.0% higher same-store sales in fiscal 2014, with the slowest growth projected for the April quarter. However, unlike rival Wal-Mart Stores ($77; WMT), Kroger says the April quarter started strong, with same-store-sales growth exceeding 3% early in the period. Management expects profit growth of 8% to 11% this year.

Conclusion

Kroger has $1.19 billion in cash versus long-term debt of $6.15 billion. Operating cash flow rose 7% to $2.84 billion last year, enough to cover interest expense six times over.

Kroger hiked its quarterly dividend 30% last year and currently yields 1.9%. Management plans to raise the payout at least once a year in the future. Kroger has also spent more than $3 billion on buybacks over the last three years, lowering its share count 20%.

The company targets long-term growth of 8% to 11% in per-share profits, plus a dividend yield of 2% to 2.5%, for a total return of 10% to 13.5%. An annual report for The Kroger Co. can be obtained at 1014 Vine Street, Cincinnati, OH, 45202; (513) 762-4000; www.kroger.com.

Kroger
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Quarter	Per-Share Earnings			Sales Change	Quarterly Price Range			P/E Ratio Range
Jan '13	$0.77	vs.	$0.63	13%	$28.00	-	$24.19	12 - 10
Oct '12	0.46	vs.	0.33	6%	25.44	-	21.57	11 - 10
Jul '12	0.51	vs.	0.46	4%	23.62	-	20.98	11 - 10
Apr '12	0.78	vs.	0.70	6%	24.78	-	22.92	12 - 11

Year (Jan.)	Sales (Bil.)	Per-Share Earnings*	Per-Share Dividend	52-Week Price Range			P/E Ratio Range
2013	$96.75	$2.52	$0.50	$28.00	-	$20.98	11 - 8
2012	90.37	2.12	0.43	25.85	-	21.14	12 - 10
2011	82.19	1.76	0.39	24.14	-	19.08	14 - 11
2010	76.73	1.71	0.37	24.80	-	19.39	15 - 11

Quadrix Scores†
Overall	Momentum	Value	Quality	Financial Strength	Earnings Estimates	Performance
97	94	81	83	34	75	88
* Earnings exclude special items. † Quadrix® scores are percentile ranks, with 100 the best.