The Kroger Co. (KR): This Is No Ordinary Supermarket

Investors forget that Kroger is more than just a supermarket

Kroger also operates several chains of convenience stores and jewelry shops. Pharmacy and jewelry account for 10% of the company’s revenues and an even higher portion of the firm’s profits so it’s unfair to label this company as a pure-play grocery business.

In addition Kroger’s $2.4 billion acquisition of Harris Teeter represents the beginning of the company’s efforts to move into high-end retail. This segment is attractive because of its faster growth and fatter margins. All round, it’s a smart move for the company.

Kroger isn’t as expensive as you might think

Of course at the end of the day The Kroger Co. (NYSE:KR) is still a grocer. Why should investors pay a premium for the stock?

Because Kroger is still cranking out surprisingly strong growth. On the top line, the company is generating 3.5% same store sales gains with plans to open additional locations. Throw in some improved operational efficiencies and a steady share buyback program and you have a recipe for 10% earnings growth.

Yes, you read that right. Management is targeting a long-term annual earnings growth rate between 9% and 11%.

When you consider that shares are trading at around 11 times forward earnings, Kroger’s valuation looks downright reasonable with a 1.1 PEG ratio. That’s perhaps a simplistic analysis, but that ratio is well below turbo-charged growth stocks like Whole Foods or The Fresh Market Inc (NASDAQ:TFM).

Foolish bottom line

The Kroger Co. (NYSE:KR) was priced as a stodgy old supermarket. But this company is no ordinary grocer – and investors are just starting to realize that.

The article This Is No Ordinary Supermarket originally appeared on Fool.com and is written by Robert Baillieul.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares of Supervalu. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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