Kroger Co (NYSE:KR) stock has been struggling over the last year. Shares of KR have lost nearly 20% of their value over the past 12 months, while the broader market has gained nearly as much over the same time period. Retail, though, has been a soft spot for the American economy, with the industry losing jobs at recession-like rates, and the most recently reported monthly retail sales coming in worse than expected. Plus, Kroger has a new headwind in its path: competition from German retailer Lidl.
For those not familiar, Kroger is one of America’s largest retailers. In addition to its grocery stores, it also has nearly 800 convenience stores and more than 300 jewelry store locations.
Lidl is a small, discount grocer that has, thus far, only opened locations in the northeastern United States. Now, though, the company is beginning to expand further across the States, specifically at locations in Pennsylvania and Kroger’s home state of Ohio.
While this might seem like the straw that could break Kroger’s back, changing competition is par for the course, especially in the uber-competitive grocery industry. Kroger’s razor-thin margins could possibly be squeezed more by a new competitor — especially a discount-oriented one — but Kroger has long hung its hat on customer service and loyalty.
Lidl, however, hasn’t even opened a store, and it can be tough to get customers to change their shopping habits, especially with groceries, where loyalty and routine play an even larger role. To panic because of the Lidl news would be preemptive, to say the least.
While Kroger’s earnings are expected to slide a decent amount for the current quarter, growth of 6% is on tap for the long term. Plus, the company’s move of opening more small-concept stores could be a perfect balance to the Lidl expansion. As I’ve pointed out previously, Kroger has been able to post growth despite the toughness of its field. For example, back in 2014, sales were just $96.7 billion, but have since expanded to $115.3.
What This Means for KR Stock
Right now, Kroger stock has a forward price-to-earnings ratio of 12 and comes with a 1.6% dividend. Meanwhile, competitors in the industry, such as Whole Foods Market, Inc. (NASDAQ:WFM), have been stumbling. That’s far more important than a small-scale expansion from Lidl.
All in all, I like KR stock, despite its recent weakness. I think it offers investors value with the recent slide, and I believe that Kroger will continue to weather the sector’s headwinds and ever-tough competition.
The grocery business has never been an easy one. Thin margins and a constantly shifting landscape offer plenty of landmines. The fact that Kroger has the track record it does proves that management understands the business and will continue to make decisions and changes to grow earnings and KR stock alike.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
