Wal-Mart Stores, Inc. (WMT), The Kroger Co. (KR): I Like The Company, But These 3 Numbers Worry Me

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It’s highly unlikely that the company can continue to retire shares at this pace with debt financing. This means that investors expecting a 16% increase in EPS like in the current quarter could be disappointed in the future. The Kroger Co. (NYSE:KR)’s debt-to-equity ratio is 0.68, which is okay relative to Target at 0.89. However, on a relative basis, Wal-Mart Stores, Inc. (NYSE:WMT)’s debt-to-equity of 0.57 or the debt-free Whole Foods, are in a relatively better position.

Last but not least, Kroger’s accomplished much of their earnings increase through a substantial decline in SG&A expenses. While this is normally a good thing, I worry that the company’s SG&A percentage isn’t sustainable. In the last three months, Kroger’s SG&A expense as a percentage of sales was 15.27%. By comparison, Wal-Mart’s SG&A percentage was 18.18%, Target was at 19.19%, and Whole Foods was at 28.40%. It seems likely that Kroger’s SG&A percentage will revert to the norm, thus hurting the company’s earnings.

Here’s My Main Problem
The biggest thing standing in my way of investing in Kroger is there are better values elsewhere. Kroger’s yield of 1.83% is better than Whole Foods at 0.9%, but isn’t as high as either Target at 2.1% or Wal-Mart Stores, Inc. (NYSE:WMT) at 2.5%. Kroger’s estimated EPS growth of 8.2% also falls short of all of its peers. Whole Foods leads the way with analysts calling for 18.68% EPS growth. Target is expected to grow by 11.87%, and Wal-Mart should grow by 9.04%.

It’s true that Kroger’s forward P/E ratio is just 11.87. Compared to P/E ratios of 14 at Wal-Mart Stores, Inc. (NYSE:WMT), nearly 15 at Target, and 30 at Whole Foods, The Kroger Co. (NYSE:KR) looks cheap. However, Kroger’s lower yield and lower growth means the company’s shares should sell for a discount.

Of their peers, Target appears to be the best alternative value. The company has an expanded grocery selection in 75% of their stores. Target’s combination of yield and growth gives investors a total expected return of 13.97%, which is far better than Kroger at 10.03%. Target’s P/E ratio of 14.85 is only higher than Kroger by 25%, but the company’s total expected return is almost 40% higher.

I really want to like Kroger, but as long as the company runs up debt to repurchase shares, and Target offers a better value, it’s hard for me to find a reason to buy. Investors in Kroger should seriously consider trading up to hit the bullseye with their returns.

The article I Like The Company, But These 3 Numbers Worry Me originally appeared on Fool.com and is written by Chad Henage.

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