Kroger (KR) is an American retail company operating the largest supermarket (in terms of revenue) in the country. Though the stock has lost much of its market share to rivals like Walmart post-2018, it made it through the pandemic relatively unscathed as demand for groceries and home cleaning supplies were on the rise.

It operates in the essential food business and didn’t have to face the wrath of the pandemic, unlike many others. Kroger’s fundamentals are strong even now and currently, the stock is around 35% up year-to-date and about 20% up compared to last year. Also, since the stock is trading at its 52-week high now, it is the perfect time to inspect the stock further.

Inflation Effect

Post the pandemic there has been a steep rise in inflation all over the world. Kroger along with other grocers will have to figure out how to protect its bottom line. There was an increase in stock-piling across the country last March when the pandemic first hit. Will it continue now? Although it was initially assumed that the pandemic was solely responsible for such a rise in stockpiling within the country, the change in consumer behavior has also significantly contributed to such a situation. 

Now, as the cases of Delta variant of COVID-19 are steadily increasing once again, the customers are again in a cautious state of mind assuming that there might be another stock-out situation happening soon. As a result, people’s spending on groceries and other hygiene essentials have increased once again and supermarkets like Kroger should encash on such a chaotic situation.

According to the US Federal Reserve, inflation will remain high until it is satisfied the economy doesn’t need easy money anymore. Markets believe that a high-inflation scenario is going to stay for a longer time especially with respect to commodities like food products. As per the CPI report, inflation for the 12-month ending in July 2021 (excluding food and energy) has been recorded at 5.4% which is the fastest rising inflation recorded compared to past years. Food alone has seen a 0.7% rise last month while the 12-month index for food has increased 3.4% during the last month. This spike in food inflation clearly shows what the food industry might be experiencing now and that stocks like Kroger would be having magnificent earnings in the days to come.

Decent Revenues

Kroger is not the most popular grocer in the US but the company is striving really hard to make a mark for itself. This time around, market analysts were not very optimistic about its performance, yet the company’s fiscal first-quarter financials beat their estimates. The company’s same-store sales saw a 4.1% decline this quarter amounting to $41.3 billion compared to the $41.5 billion achieved a year ago. This reduction in revenue had occurred primarily because last year there was uncertainty amongst people about how long the country-wide lockdowns would last and therefore people were simply stocking up essential items fearing stock-out possibilities.

Additionally, the decrease in revenue figures had influenced the company’s EPS (earnings per share) and operating profit which also came down to $0.18 and $805 million respectively from the $1.52 and $1.32 billion achieved during the corresponding period of last year. The company’s gross margin rate also got reduced by 65 basis points. 

Moreover, some positive points were also noticed from the company’s financials. The company's same-store sales had grown by 14.9% over the last two-year period. Also, as a result of increased traffic towards e-commerce platforms, the digital sales of the company witnessed a 16% growth this quarter compared to last year and a massive 108% compared to the last 2-year period. 

Little steps to improvement

Kroger has been taking a great set of steps to improve its performance. In the last quarter, it had launched 253 new items that included seasonal fresh produce and products for aiding in summer cooking. This way of introducing newer products at a continuous interval can surely boost a company’s popularity in the market. Moreover, Partnering with Drone Express for launching Kroger Drone Delivery was another great move to increase the company’s flexibility and the overall customer experience it provides. The expansion of partnership with 80 Acres Farms for having access to 316 additional stores had increased the company’s accessibility in the Midwest region to a large extent. Lastly, the digital farmers’ market it had launched to connect the local farmers and businesses seeking their products through an e-commerce platform was another good move that can possibly provide the company with its required momentum.

Handsome returns

Many investors prefer investing in those stocks that regularly share a part of their profits with them in the form of dividends apart from providing the required capital appreciation. All those investors may consider investing in Kroger. The stock might not be that tempting as it has gained only around 40% in the past 5 years and the fact that it does not pay as high dividends as the other grocery stores in the US.  Still, its payout of $0.21 per share leading to a yield of 1.9% seems good enough. Moreover, the dividend payouts appear to be quite sustainable because they are backed by a sufficient amount of free cash flows generated by the company. It is always worth choosing those companies that can sustain their payouts over others that lack sustainability.

The above-mentioned points justify that Kroger is a pretty decent stock to buy. Now, the stock is already trading at its 52-week high and might gain some more in the coming days as inflation in the food industry is still high and would ensure outsized returns to the company. Therefore, investors can buy this stock now and keep track of the market until it starts falling and make some money in the process.