There is no doubt that in an inflationary environment — such as the one in which we find ourselves now — consumer spending habits are affected, observes Tony Daltorio, editor of Market Mavens.

Investors will also find that their spending habits need to change. Instead of pursuing growth stocks at any price, investors need to look to stocks that can offer at least a partial hedge against inflation. One such safe harbor against an inflationary storm you may want to consider is the grocery store sector.

Regardless of what happens in the economy, food is a necessity. That allows grocers to pass along their higher costs from inflation to the consumer. Meanwhile, many are eating out less and cooking more at home. This is helping to boost grocery store sales.

My favorite company in the sector is Kroger (KR). The company is the largest standalone grocer in the U.S. It operated about 2,700 retail supermarkets and multi-department stores in 35 states at the end of its 2022 fiscal year.

Kroger's latest earnings results, which were reported on September 9, 2022, were outstanding. Total company sales were $34.6 billion in the second quarter, compared to $31.7 billion for the same period last year. Excluding fuel, sales increased 5.2% compared to the same period last year.

Management also lifted full-year guidance for the second time in six months. The company now expects $3.95–$4.05 in adjusted diluted EPS ($0.10 higher), with identical sales without fuel to be in the range of 4.0% to 4.5%.

Consumers are switching to the company's cheaper private label brands. Like-for-like sales of owned store brands rose 10.2% in the second quarter compared with the aforementioned total growth of 5.2%. Despite being sold at a lower price point, private label products tend to yield fatter margins. This was reflected in the 14% jump in Kroger's operating profit for the quarter.

Kroger continues to generate strong free cash flow and is maintaining its current investment grade debt rating while returning excess free cash flow to shareholders via share repurchases and a growing dividend over time. The company's net total debt to adjusted EBITDA ratio is 1.63, compared to 1.78 a year ago.

Overall, I remain very optimistic on Kroger's outlook going forward. The stock is currently trading at a mere 12 times forward earnings. The dividend is 2.06%. Earlier this quarter, Kroger increased its dividend by 24%, marking the 16th consecutive year of dividend increases.

Additionally, during the quarter, Kroger repurchased $309 million in shares; year-to-date, it has repurchased $975 million in shares. In fact, the company has repurchased more than $6.5 billion worth of shares over the past five years. And on September 9, the Board of Directors authorized a new $1 billion share repurchase program.

Of course, competition is fierce when it comes to selling food and household essentials. But Kroger is showing it can hold its own. High inflation is not going away for a while. This should mean more upside for Kroger stock and a higher dividend payout.

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