When you follow the stock market for as long as I have you develop a very wide base of industry inputs. My email inbox fills up with various and sundry industry-specific publications including Supermarket News' daily update. So, yes, I've been invested in the "supers" before, although mainly on the fixed-income side, and I have the scars to prove it.
It flew under the radar with buoyancy of the rest of the stock market, especially big-cap tech, but Kroger (KR) shares had a nice little move in the past six months, rising from $22 to $30 before a pullback. I used the past tense in the prior sentence because Kroger shares are getting hammered Thursday on guidance for 2018 earnings that disappointed analysts.
So, is Kroger's crash just a (frozen) chicken coming home to roost? Are fundamentals in the supermarket industry so consistently negative that the stocks should always be avoided? No, I don't think so. One must approach the supers with extreme caution, but if you are a deep-value investor, the returns on capital in the industry are generally not reflected in group valuations. You need to calibrate your timing so as not to fall into a value trap.
Whole Foods reported one disappointing quarter after another for years (I had their streak at six consecutive "misses" based on my estimates; Street numbers can differ) and then, bam, Jeff Bezos came in and rescued shareholders. In the filings relating to Amazon's (AMZN) takeover, Whole Foods noted that the company had received multiple bids, although of course they didn't disclose names. Industry scuttlebutt centered around private equity players, and that showed the value in the supers.
That a bidding war could break out over an asset that the public market was constantly devaluing was not surprising to me. Why? What good are supermarkets? People shop there. Everyday. That is the ultimate value of a supermarket chain, the fact that those stores generate so much foot traffic. You have to eat, don't you?
That's what Bezos saw in Whole Foods and I believe the list of his business missteps would be a very short one. I make it a point never to bet against him.
But that still leaves the question of valuation. Amazon had more money in cash on its balance sheet than it paid for Whole Foods (though Amazon eventually -- and wisely -- financed the purchase with debt) and you probably don't have a section of your portfolio called "might work." Few do.
Kroger management guided to earnings per share for 2018 of $1.95-$2.15, and based on the midpoint of that range KR is trading today at 11.5x P/E versus the S&P 500's level of over 17x.
Aside from its low valuation, though, Kroger offers solid comps (1.7% on a same-store basis,) an expanding online presence and a proactive return-on-capital program highlighted by the last 12 months' share repurchases of $1.6 billion and common dividends paid of $444 million.
Kroger management expects the sale of its convenience store business (including my childhood favorite, Turkey Hill) to close in 1Q18 and that, plus the positive impact of the Tax Cuts and Jobs Act, give the company plenty of firepower to repurchase shares more aggressively.
So, I'm looking at KR, not buying it, today. If trade wars become the rule, Kroger would seem to be immune from adverse effects, and that is another plus. I just need to convince myself that KR is not a value trap, and whether it is worth my time to begin reading Supermarket News again.