Leveraging its pricing power with changing consumer behavior, the Kroger Co. ( KR - news - people ) boasts strong customer loyalty thanks to deeply discounted value items targeting low-end consumers. While discretionary spending was weakening, Wal-Mart ( WMT - news - people ) made significant inroads into the low-end grocery market that comprises Kroger's target demographic. But Kroger's pricing is helping to win back customers, and the company's cheap share price makes for a great value buy.
Kroger is the largest grocery store chain in the U.S., with 2,470 supermarkets generating $76 billion in annual sales. The Cincinatti, Ohio-based retailer appears to be luring shoppers away from higher-priced competitors like privately-held Publix Super Markets ( PUSH.OB - news - people ) with their value oriented business model. Kroger aggressively sells a large percentage of store-owned brands to boost volume, compared with high-end grocer Whole Foods Market ( WFMI - news - people ), which earns its money more on margins than on volume.
There is a concern that traditional supermarkets will lose ground to deep discount megastores. Even with the perception that consumers will trade down to deep discounters like Wal-Mart and Costco ( COST - news - people ) (COST), Wall Street still had lofty expectations for Kroger. While other retailers saw earnings expectations lowered to rock-bottom levels, Kroger did not. Too much optimism from analysts contributed to second quarter results coming in below Wall Street's expectations.
Same store sales, excluding fuel, rose 2.6%, significantly outperforming competitors in the food retail segment. The decline in earnings, coupled with the growth in same-store sales, likely means that Kroger is gaining market share from competitors in the grocer space. Kroger lowered projected earnings for 2009 into the $1.90 to $2 per share range due to the drop in aggregate earnings, but reiterated same-store sales growth forecast of 3% to 4%.
Despite producing relatively consistent sales, shares of Kroger are trading near the 52-week low after reaching above $23 per share in early June 2009. After hitting an all-time high in June 2007, Kroger retraced steeply to the 52-week low at $19.39 on March 9, a 36% decline.
The $0.095 dividend yields a paltry 1.9%, but with a price-to-earnings ratio of 10.5, compared with Winn-Dixie ( WINN - news - people ) Stores' priced at 18 times earnings, Kroger appears to be undervalued.
Kroger has near-term, strong support at $20.27 and room to run back to its price before the earnings release of $21.74.
While Kroger is down 22% year-to-date, other supermarket chain stocks have not been discounted as deeply. Winn-Dixie Stores (WINN) is down 18%, Safeway ( SWY - news - people ) has dropped 17%, while SUPERVALU (SVU) is up 2.7%. Kroger's September swoon has discounted the grocer's shares, leaving room to run higher as investors may come to reevaluate the grocer more in line with the high regard given its peers.
