The Kroger Co. (KR), Wal-Mart Stores, Inc. (WMT): This Supermarket Chain Offers Superior Value

With consumer staple stocks continuing their grind higher, so far with no end in sight, it’s becoming difficult to find stocks in the sector that are still trading at low valuations. With the sector up nearly 20% this year, many stocks are in fact trading at steep premiums. However, there are always bargains to be found. One supermarket and department store chain, The Kroger Co. (NYSE:KR), is still trading at a very reasonable multiple, and is growing earnings impressively to boot.

Introducing Kroger

The Kroger Co. (NYSE:KR) operates a range of retail locations in the United States, with around 3,500 supermarkets, department stores and convenience stores. Many of these also have fuel centers. The stock has a market cap of $18.13 billion and employs a huge 343,000 people. The stock’s rise has outpaced its sector, tacking on nearly 55% in the last 12 months with a beta of only 0.38. The stock yields about 1.7% with a low payout ratio of 18%.

Earnings Growth

Annual EPS has been growing nicely over the last few years, going from $1.71 in 2010 to $2.63 in fiscal 2012. For 2012, the company had a number of fairly solid beats, and analysts expect EPS to be up to $2.77 in the coming fiscal year. The latest Q4 report was particularly encouraging, with record full-year results.

For the quarter, the company reported EPS of $0.88, up from $0.50 in the same period a year earlier. Adjusting for the extra week in Q4 2012, sales increased by 3.7% over Q4 2011 while total sales increased 12.8%. On the other hand, gross margin declined a bit. For the full year, total sales increased by 7.1%, and 4.9% excluding the extra week.

According to management, these strong results are a reflection of the company’s commitment to its customers and its low-pricing strategy. The company has a strong history of creating value for shareholders through stock buybacks and dividend increases, a strategy which management continues to adhere to.

Competitors

As The Kroger Co. (NYSE:KR) is a large diversified retailer, it makes sense to compare the firm to other diversified retail companies. Wal-Mart Stores, Inc. (NYSE:WMT) is one the major companies active in this space, and has also been doing a stellar job of growing earnings in the last few years, going from an annual EPS of $2.89 in 2007 to $5.02 in fiscal 2013, easily outpacing the industry growth rate. However, the company has a fairly poor reputation, and recently rejected Bangladesh factory safety accords in favor of its own measures.