Put Kroger in your Shopping Cart

12/10/2014 7:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Our latest new recommendation is the second-largest food retailer in the US; it generates about $98 billion in annual sales from its 2,600 locations spread across 31 states, observes Elliott Gue, editor of Capitalist Times.

Kroger (KR) operates convenience stores and supermarkets under a number of different brand names including Tom Thumb, Kroger, and Harris Teeter.

In its most recent earnings call, management raised its full-year guidance for earnings per share and sales growth at stores open for at least one year. The decline in energy costs should boost spending among lower-income consumers, an important demographic for mass-market grocery store chains.

Kroger also offers exposure to several company-specific upside catalysts, including the success of the firm’s Simple Truth corporate brand, which specializes in natural and organic foods.

Natural and organic products is the fastest-growing segment in the grocer industry. Kroger launched Simple Truth in January 2013 and expects the label to reach $1 billion in sales by the start of 2015.

The $2.5 billion acquisition of Harris Teeter, completed at the beginning of this year, also appears to be on track. The deal offers significant opportunities for expansion over the next few years.

Finally, Kroger remains at the forefront of a technology revolution in the grocery business. It has partnered with analytics firm Dunnhumby to better understand consumers’ spending patterns and develop targeted promotions for specific customer groups.

And Harris Teeter already had a rapidly growing e-commerce business allowing consumers to purchase items online and pick them up at stores.

These drivers should enable Kroger to grow its earnings at an average annual rate of 8% to 11% in coming years while returning capital to shareholders via buybacks and dividend increases.

The company has reduced its float to less than 500 million shares from more than 723 million at the end of 2006 and has grown its dividend at an annualized pace of 13.3% over the past five years.

Investors should regard any pullback to less than $60 as an opportunity to back up their shopping carts.

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