The Kroger Co. (KR), Harris Teeter Supermarkets Inc (HTSI): Growth Gets Better With Size For These Retailers

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The Kroger Co. (NYSE:KR) hasn’t been present in high-growth, upscale markets that have a larger population, but this acquisition will help it increase its presence in these markets, such as Washington D.C. The Kroger Co. (NYSE:KR) will have the opportunity to exploit a high growth market using Harris Teeter Supermarkets Inc (NYSE:HTSI)’s assets and its existing infrastructure. This acquisition is expected to bring cost synergies of $40-$50 million annually in the next 3-4 years.

Harris Teeter Supermarkets Inc (NYSE:HTSI) is a chain of grocery stores in the U.S. with 212 stores across eight states. Its stores are located in popular tourist destinations, university towns, and other high growth cities. The competition from Wal-Mart and regional retailer Publix in these regions could be one of the reasons why Harris Teeter decided to go ahead with its sale–with the help of The Kroger Co. (NYSE:KR)’s higher scale of operation and infrastructure, it plans to compete with the big boys. Harris could enhance its loyalty based marketing and general merchandise assortment with the help of Kroger’s strong purchasing power, information systems, and loyalty programs. Kroger doesn’t plan to close any of Harris Teeter Supermarkets Inc (NYSE:HTSI)’s stores, and could give Harris plenty of autonomy in running its stores.

On the other hand, the acquisition of Harris Teeter will affect The Kroger Co. (NYSE:KR)’s share repurchase program. The program is expected to be in the range of $200-$400 million this year, down from the $1 billion buybacks announced last year. This is because Kroger will use its cash to pay off its maturing debt to protect its investment-grade rating. This will negatively affect the near-term EPS of Kroger. The total debt, after all the restructuring, is expected to be around $10-$10.5 billion by the end of this year. However, synergy gains from the Harris Teeter Supermarkets Inc (NYSE:HTSI) acquisition will offset the lower EPS, and it is expected to cause EPS accretion of $0.06-$0.09 in the first 12 months post-acquisition.

Conclusion
Companhia Brasileira de Distrib. (ADR) (NYSE:CBD) is capitalizing on changing consumer preference toward buying food away from home. It is opening up new stores, both in self-service with Assai, and in the food mini-market space with Minimercado.

Kroger has acquired Harris Teeter to enter upscale and high growth markets. Harris Teeter will take advantage of Kroger’s strong purchasing power and loyalty programs. While the acquisition will reduce share buybacks in the short term, it will generate free cash flows to use toward share repurchases in the future.

Looking at the growth prospects, I recommend a buy on all three stocks.

The article Growth Gets Better With Size For These Retailers originally appeared on Fool.com is written by Madhukar Dubey.

Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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