Attention The Kroger Co. (KR) Shoppers

I had always dismissed The Kroger Co. (NYSE:KR), which dominates many Southeastern markets, until a decade ago when Harris-Teeter came to town. The company had a good reputation, it had a large ready-to-eat section, and my kids considered it a great “Friday night delicacy” to wander a nearby two-story store and get their “night out” dinner to take home.

Then, quite suddenly, Harris-Teeter pulled out of the market. Most of their stores became Kroger locations, and I thought little about it.

This week, The Kroger Co. (NYSE:KR) got a bump in price after announcing it would buy Harris-Teeter, whose stock symbol was HTSI, for $2.4 billion, about a third more than the North Carolina company was worth when it basically put itself up for bids early this year.

Could this mean it’s time for you to personally stock up on Kroger? Could be.

The case for Kroger

Kroger is now the second-largest retailer in the U.S., behind only Wal-Mart (NYSE:WMT). You probably don’t know that because you only see the grocery stores.

But have you ever been to Fred Meyer in Portland? The department store is owned by Kroger. Ralph’s, in California? Kroger again. The Fry’s food stores in Phoenix (as distinct from the California-based electronics retailer)? Kroger again.

Each one of these chains sells a different mix of merchandise, each has a good reputation within its market, but each is actually Kroger.

The Kroger Co. (NYSE:KR) today has a market cap of $19.4 billion, and had sales of $96 billion in its most recent fiscal year. So you’re paying about $1 for each $5 of sales.

What about Wal-Mart? Or Costco?

By way of comparison, Wal-Mart Stores, Inc. (NYSE:WMT) has a market cap of $255 billion on about $470 billion in sales, a ratio of less than $1 to $2, while Costco Wholesale Corporation (NASDAQ:COST) is worth about $25 billion for its $99 billion in sales, $1 in equity for each $4 in sales.

Ah, but doesn’t Kroger live in a world of wafer-thin grocery margins? Yes. Costco made about $1.7 billion last year on its sales, or about 1.7%, while Wal-Mart made $17 billion on its sales, a margin of about 4%. Kroger had profits of $1.48 billion on its $96 billion in sales, a margin of 1.5%. It’s this margin differential that makes those larger companies worth more on the market.

Trouble is, you’re paying a lot for that small difference in margins. Wal-Mart’s Price/Earnings (P/E) multiple is about 15.2, Costco’s a whopping 25, and Kroger’s is just 12.8.