Yahoo Finance KR Stock: How Does Kroger Co Stack Up?
For consumers, food deflation is a wonderful thing. Cheaper food means less spent at the grocery store.
But for grocers, deflation can become a problem. Prices that fall too low will eat into revenues, even if the company sells more products. And for the Kroger Co (ticker: KR), a 0.4 percent drop in all food prices over the past 12 months has led to a 20 percent drop in KR stock.
There are other issues at play, as well, including Wal-Mart Stores' ( WMT) ongoing presence in the grocery space and new grocery delivery models that continue to creep into the Cincinnati company's business.
[See: 10 Ways to Shop Smarter at the Grocery Store.]
Has the recent fall suppressed the stock enough that it has become an attractive, super-saver's special? Or will these problems that most grocers face keep Kroger away from the checkout aisle?
Deflation remains a big problem for Kroger. By November, the price of food that one eats at home dropped 2.2 percent for the year, according to the Consumer Price Index.
With falling food costs, competitors will drop food prices, which forces Kroger to follow suit. The lower prices sap total sales, even if sales volume rises, says Telsey Advisory Group analyst Joe Feldman. It's a big reason why net sales, excluding fuel, only rose 1.5 percent through the first three quarters of 2016.
While it's not the only grocer that faces the food deflation crunch -- Whole Foods Market ( WFM) is down 5 percent over the past year, in part due to the unnerving trend -- Kroger has taken steps over the past few years to reduce prices. This gives Kroger less room to maneuver when deflation takes hold, crunching margins, which fell .05 percent in the third quarter compared to the year before.
But it has one advantage: Kroger's own manufacturing capabilities produce 40 percent of its private-label brands. This gives Kroger control in how the products are manufactured and priced.
Since it doesn't have to worry about third-party vendors for these products, it can react to price changes faster than other competitors, says Karen Short, a managing director at Barclays. For instance, if milk decreases in price, then Kroger can pass that along to its customers almost immediately without worrying about a contract it has with a third-party supplier, which could delay a price tweak.
Kroger looks to data to keep prices low. Despite its $110 billion in sales, Kroger comes in as the second-largest grocer in the U.S. It falls behind Wal-Mart, which took strides to grow its grocery presence throughout the early 2000s.
Wal-Mart competed against other grocers through price. Since many grocery stores couldn't compete on price, they turned to tactics, like fixing up stores, in order to improve the experience. Kroger went a different route and tried to reduce the price of its products, according to Short.
It expanded on this strategy through the purchase of a data analytics firm in 2015. Through this analysis, it's able to increase or decrease prices on products faster than most in the industry, Feldman says. It also gives Kroger the capability to drive sales through promotions, by targeting customers with more personalized deals.
"No other retailer has (the) data analytics that they have," Feldman says.
[Read: Doing Grocery Delivery or Pickup? 5 Tips for a Better Shopping Experience.]
The company also looks to cut costs in other ways, where it can. In December, Kroger announced that it would ask 2,000 non-store employees to take early retirement, and it doesn't plan to fill the positions once the workers depart. CEO Rodney McMullen says the cutback was a commitment "to our operating model of lowering costs to invest in the areas that matter most to our customers." The firm has about 431,000 people on the payroll.
Efforts such as these have allowed Kroger to keep products priced close enough to Wal-Mart that it "doesn't give the customer an incentive to shop someplace else," Feldman says.
At-home delivery remains a conundrum. The growth of alternative grocery shopping models have come and gone for years, without anyone landing on one that has had the impact Amazon.com ( AMZN) has had in regular retail circles. But the success of Blue Apron and HelloFresh has shown that residents of some areas of the U.S. are more than comfortable having their groceries delivered to their home.
Kroger has grown its click-and-collect strategy where a customer can place an order online then pick it up on the way home. This service has expanded to more than 550 stores, according to its latest earnings report.
Part of the reason for the delay in offering delivery is due to the complications involved with such a service, says Chuck Cerankosky, an analyst for Northcoast Research. Since some fresh food items must stay refrigerated, it's difficult to offer without losing money.
But as such startups become more popular, Kroger may need to swallow some of the costs for home delivery to ensure it keeps local customers, Short says.
"It doesn't matter where you are in the U.S., home delivery is wanted by customers as an option," she says. "It might not matter what the price is, (Kroger) may need to do it."
Kroger is testing home delivery primarily in Denver but has yet to roll it out to a larger customer base.
The price isn't cheap, but it comes with a bonus. Despite the company's recent drop in stock price, it's not exactly a bottom-of-the-barrel sale. Feldman estimates its price-to-earnings ratio at 14.2 for the full-year 2017. That makes it slightly cheaper than the three-year average of 15.4 for the company, but right in line with competitors.
"I wouldn't call it cheap at the moment," Feldman says.
[See: 6 Reliable Dividend Stocks Paying Out for 100 Years or More.]
But he adds it comes with a consistent dividend yield of 1.36 percent, as Kroger sent $418 million to investors during the third quarter.
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