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Home Forums Ideas and Valuations Consumer Staples Kroger Investment? (6/16/2017)

This topic contains 5 replies, has 4 voices, and was last updated by  Erik Kobayashi-Solomon 1 year, 7 months ago.

  • #6761

    Carey
    Participant

    Yesterday Kroger had a near-20% drop in its stock price following the news that same-store sales have declined for 5 straight quarters. Erik sent out a note on this, so I took a look into it. This is my local perspective on Kroger and the industry; didn't Peter Lynch tell us to buy the things we know something about? And in our house, I do most of the cooking and most of the grocery shopping.

    Where I live, Raleigh-Durham-Cary-Chapel Hill NC area, is ground zero for the grocery wars. The big store chains are (in order, based on sales) Wal-mart, Food Lion, Harris Teeter, Kroger, Food Lion, and Lowe's Food. Other smaller/specialty store chains already here are Whole Foods, Sprouts, Earthfare, Aldi, Fresh Market.

    Now more of the big boys are coming to town – Publix (2 new stores); Lidl (#1 grocery chain in Europe); Wegman's (the #1 rated store with consumers); and H-Mart (a big Asian grocery). Harris Teeter, headquartered in Charlotte, was so scared about Publix coming into this area they sold themselves to Kroger. Aldi is planning big increases in their US investment (not sure why, these are peculiar little stores). So we have all this competition and all these opportunities for consumers. But why are they coming? This area has excellent growth and high annual incomes. I don't have any experience with Lidl yet, but I do know Publix and Wegman's have very large prepared food sections catering to those too busy or self-important to cook anything and, without investment, Kroger and Harris-Teeter do not compare in this area. I know Kroger owns a lot of brands but I don't have a lot of familiarity with them other than Harris-Teeter.

    On the plus side, I think Kroger is pretty well run (at the corporate level) with the overall best pricing once you factor in their weekly sales. On the other hand, they have a unionized employee base and sometimes you have to wonder how some of their folks got hired in the first place. So what have we got? A financially efficient business in an intensely competitive environment with a rapidly changing customer profile – more prepared, online shopping, probably home delivery.

    Looking at their stock, it has been stepping downward since October when it peaked around $42, so it was already down 30% before yesterday's drop. I have been through their investor web site and I am having trouble getting clarity around how they plan to address these issues (but no problem understanding their continued efficiency programs). From a stock purchase standpoint, I don't think it's time yet (“investors might want a larger margin of safety”). And I don't think the options market is offering any opportunities – I had hoped to see a big pop in volatility for maybe selling some October puts, but it just doesn't look very good to me.

    #6771

    Carey
    Participant

    I made two trades in Kroger yesterday:

    sold 10/20/17 21 puts; bought 1/19/19 27.5 calls; net debit 0.15 per share.

    #6772

    Joe Miramonti
    Keymaster

    Super Carey, I added 500 shares of KR yesterday and one of our other members is starting an AMZN valuation, so that will also be interesting in light of the recent acquisition.

    Have a look at Erik's updated valuation at https://frameworkinvesting.com/fwi-tear-sheet-kroger-kr/

    #6775

    Evan Bledsoe
    Participant

    I also picked my price on KR – I sold the $20 Oct Puts. Cash secured of course.

    #6777

    Hi Evan,

    Glad that you found some well-priced options. Looks like the stock is recovering a bit today!

    All the best,
    Erik

    #6778

    Hi Carey,

    Thanks for your perspective on KR and for talking through it during Office Hours the other day!

    All the best,
    Erik

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