Kroger (KR), No. 1 in U.S. grocery-chain sales, with 2,500 supermarkets in 32 states, is taking a leaf from the book of its nemesis, Wal-Mart Stores (WMT). Starting with 23 outlets (in Arizona, Ohio, and Utah), it is adding higher-margin nonfoods, such as toys, furniture, and bedding. Kroger has suffered from Wal-Mart's incursion into the food business. Now, Kroger is on a "fundamental turnaround," says Scott Kuensell of Brandywine Asset Management, which owns stock. He notes that Kroger is starting to raise grocery prices and fatten margins, which shrank during Kroger's former price-cutting. Its stock -- stuck since August between 15 and 17, where it is now -- has been stymied by a strike in Southern California (now settled) and fierce competition. The stock is a bargain, says Kuensell, trading at just 12.5 times his 2006 earnings forecast of $1.35 a share, up from 2005's estimated $1.11 and 2004's 42 cents. His 12-month target is 25. Kuensell says Kroger is likely to beat analysts' estimates. According to Zacks Investment Research, the 2006 mean estimate is $1.25. John Heinbockel of Goldman Sachs (GS), which has done banking for Kroger, says nonfoods, which are boosting sales, hold growth potential for Kroger, which "remains our preferred food retail investment." He rates the stock "outperform."
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial