Normally nobody would ask if a company that reported $122.662 billion in revenues last year can survive. We are not living in normal times, so it is important to realize even retailers as big as Kroger (NYSE: KR) are under threat.
The threat is Amazon (NASDAQ: AMZN), which has the resources to disrupt any retail segment including groceries. Amazon reported $19.823 billion in cash and equivalents and $7.277 billion in short-term investments on June 30, 2018. That gave Jeff Bezos $27.05 billion in cash to play with.
In contrast, Kroger reported just $691 million in cash and short and term investments on 26 May 2018. Kroger seemingly lacks the resources the resources to compete with Amazon.
Generating $37.350 billion in revenues and achieving a revenue growth rate of 3.43% during 3rd Quarter 2018 gives Kroger limited protection. Amazon can open hundreds of Go stores and dozens of fulfillment centers overnight.
Can Kroger Compete with Amazon?
Moreover, Amazon has the cash to buy more supermarket chains if Bezos wants. Several grocers; including Safeway, Winn-Dixie, Albertsons, and Supervalu’s (NYSE: SVU) brands, are probably for sale.
Kroger has to sell assets to make strategic moves, all Amazon needs to do is take some cash out of the bank. When Kroger wanted to invest in British logistics firm Ocado Group PLC (LON: OCDO); it had to sell off its convenience stores. Amazon bought Whole Foods without affecting its revenue growth.
Amazon’s cash is problematic because the Everything Store is competing directly with Kroger in Southern California. Prime members in Los Angeles and Orange County are being offered Amazon Fresh two-hour grocery delivery from Whole Foods. It threatens Kroger because Amazon Fresh is competing with one of its key subsidiaries Ralph’s in the Southland.
Why Kroger Might Not Make Much Money from Delivery
Kroger needs to make alliances with companies like Ocado and Instacart to add same-day delivery service.
Therefore, Kroger finds itself dependent on organizations that can disappear quickly. Uber’s promising delivery service that Kroger was taking part in shut down in June.
On the other hand, Amazon can develop such capabilities in-house. The risk is potentially greater but so is the reward. Amazon gets to keep all the cash generated by Fresh; Kroger has to share profits with Ocado and Instacart.
For this reason, Kroger might not make much money even if its Instacart delivery is a huge hit. Kroger will end up handing a large percentage of the delivery profits to Ocado and Instacart.
A grave here is that controlling the delivery service gives Amazon the ability to deep discount. Amazon might offer free delivery or lower prices as loss leaders to get people to order groceries. This is likely because Amazon uses free delivery to entice customers to Prime.
Is Kroger Making Money?
Delivery is huge threat to Kroger, because the company is not making that much money from its business.
Kroger reported a free cash flow of $1.61 billion, an operating cash flow of $1.349 billion, a net income of $2.026 billion, and an operating income of $1.029 billion for 2nd Quarter 2018. Amazon’s net income of $2.534 billion and operating income of $2.983 billion were not much better, but it kept more cash.
Amazon reported a free cash flow of $4.5 billion and an operating cash flow of $7.449 billion for 2nd Quarter 2018. Kroger’s problem is that Amazon runs a lot more cash through its till, and keeps a larger portion of that cash.
Kroger is Spending More Money to Make Less Money
It cost Amazon $30.632 billion to generate $52.866 billion in income during 2nd Quarter 2018, Stockow calculates. Kroger, however, spent $29.362 billion to generate $37.530 billion in revenue during 2nd Quarter 2018.
Simply put, Kroger has to spend more money to make less money. Meanwhile, Amazon spends less money to make more money.
This is why, Amazon has money to burn and Kroger does not. Amazon is leading a revolution in business that is threatening every brick and mortar retailer.
For this reason, we must ask if Kroger is still a value investment. The classic definition of a value investment is a stock that makes a lot of money. Kroger might not be capable of making a lot of money in today’s world.
Kroger is still a great Contrarian Investment
Despite these circumstances, Kroger (NYSE: KR) is still a great contrarian investment because of its low share price and impressive dividend history.
Kroger was trading at $28.54 on 13 September 2018, which makes its stock a bargain. Kroger shareholders received a 14¢ dividend on 1 September 2018 up from 12.5¢ on 1 June 2018.
Moreover, Kroger investors received an annualized payout of 56¢, a dividend yield of 1.73%, and a payout ratio of 26.4% on 7 September 2018. Beyond that Kroger’s stockholders are enjoying their ninth straight year of dividend growth.
In contrast, Amazon pays no dividend. One method Jeff Bezos used to achieve that incredible rate of growth was paying no dividend.
Why you need to take a second look at Kroger Stock
At the present time, Kroger is a good investment because of the dividend and growth prospect. There are some growth opportunities at Kroger including buying up Supervalu’s stores. Supervalu is preparing to sell off its stores and concentrate on logistics, The Minneapolis Star Tribune revealed.
An even greater opportunity is leveraging Kroger’s hot food brands like The Chicken Co. with delivery. Combining hot meal takeout with grocery delivery might give Kroger a growing stream of revenues to rival Amazon’s. The only drawback to do this stratagem is sharing revenues with companies like Instacart, and Grubhub (NYSE: GRUB).
Kroger is still a great investment despite the Amazon threat. Investors looking for retail bargains should inspect America’s largest standalone grocer. Kroger is apparently the best contrarian play in American retail today.
This commentary first appeared on Market Mad House your ringside seat for the insanity of the grocery wars.