Wander through just about any decent-sized neighborhood in the
U.S. and you're likely to see a half-dozen or so different
supermarkets, all selling pretty much the same stuff in similar
There might be differences in the way supermarkets price and
display their products. But they all sell the usual assortment of
fresh produce, canned goods, meat products, frozen items, dairy
products, paper goods, prepared foods, grains and dry goods.
They also face many of the same challenges: volatile food
prices, fickle consumers, heavy competition and thin margins.
Yet some supermarket chains are in a constant struggle to
deliver consistent financial growth, while others seem to cruise
along with quarter after quarter of solid sales and earnings
Prominent among the latter group isKroger (
). It's the nation's largest traditional supermarket chain, with
more than 2,400 stores in 31 states, and the second-biggest food
retailer overall behindWal-Mart (
Kroger gets the vast majority of its business from its
supermarket business, which includes the Kroger, Ralphs and other
chains. It also operates nearly 800 convenience stores, 328 fine
jewelry stores, 1,169 supermarket fuel centers and 37
food-processing plants in the U.S.
While other traditional supermarket operators have struggled
to produce consistent financial growth over the last couple of
years, Kroger has strung together 11 straight quarters of sales
and earnings gains. Eight times during that span the company has
delivered double-digit EPS growth.
That's a pretty good record, considering the industry's recent
struggles with an uncertain economy and unpredictable food
One reason Kroger has fared so well is that it has taken an
active approach to building market share and improving its
customer experience through discount programs and other
initiatives, analysts say.
"(Kroger) has been regaining lost market share through its
tuck-in acquisitions as well as by tailoring its product and
service offerings to customers' purchasing behaviors and
patterns," noted Deborah Weinswig, an analyst at Citigroup.
On the operational side, Kroger has run off an
industry-leading 37 straight quarters of positive same-store
sales growth while still maintaining decent operating
Analysts expect that run to continue as macro trends move into
the grocery industry's favor.
Jeffrey Thomison, an analyst at Hilliard Lyons, says easing
inflation of food prices and an improving economy will benefit
Kroger in coming quarters. So will the company's ongoing
investments in improved operations and efforts to contain
"We expect the current year to produce further gains in
(same-store) sales, easing gross margin pressure and steady
operating margin," Thomison said.
A lower inflation rate should have a particularly beneficial
impact on supermarket operators like Kroger andSafeway (
), which operates more than 1,600 supermarkets in the U.S. and
Ken Goldman, an analyst at JPMorgan, notes that food retailers
tend to do better during periods of low and stable inflation.
Over the last five years, the industry has suffered from a
volatile inflationary environment, caused by either too much
inflation or steep deflation.
During periods of significant inflation, some grocers suffered
volume losses because consumers couldn't absorb the price
increases, Goldman says. In periods of deflation, certain grocers
were hurt because volume increases were not enough to offset
The good news for Kroger and other grocers is that inflation
should be much more stable over the next couple of years.
"We expect a more moderate inflationary environment for
retailers through at least 2013 and potentially into 2014,"
The wild card is how the industry's fierce competition will
impact prices. Kroger not only competes against existing
traditional grocers. It also bumps up against a steady flow of
new entrants as well as big-box retailers like Wal-Mart and
specialty grocers such asWhole Foods Market (
"Due to the overall competitiveness of the food retail
industry, we still believe a promotional environment may be
necessary to protect market share," Goldman said.
Even with the prospect of low inflation, he added, "it may be
too early to become highly optimistic on traditional grocers'
Indeed, Kroger posted a lower year-to-year gross margin during
its 2012 fourth quarter, which ended Feb. 2.
But the company still managed to deliver earnings of 77 cents
a share, excluding special items such as the benefit of an extra
week in the quarter. That was up from 50 cents the prior year and
above consensus estimates for 70 cents.
Sales for the quarter gained 13% to $24.2 billion, slightly
above views. Same-store sales excluding fuel climbed 3%.
Analyst Thomison cited several encouraging developments during
the quarter, including improvement in the number of visits per
household and the number of units per basket. Kroger also saw
more sales of its own store-brand goods.
"Company-branded products represented about one-third of
grocery units sold, reflecting considerable success with Kroger's
Simple Truth and Simple Truth Organic brands," Thomison said.
Meanwhile, the company's strong cash flow might lead to more
acquisitions in coming quarters.
"We believe acquisitions are a possible use of free cash flow
in 2013 but have not factored any into our outlook," Thomison
Kroger is scheduled to report its fiscal second-quarter
earnings on June 20. Analysts polled by Thomson Reuters expect
profit to come in at 88 cents a share, up from 78 cents a year
The company's stock price touched a record high of 35.42 on
May 17 and currently trades near 35.