Kroger Is Still Ahead Of The Game, Despite Its 25% Tumble

Last Wednesday, Argus hosted a Retail Conference Call. Among other stocks, Senior Retail Analyst Chris Graja shared a look at Kroger Co (NYSE: KR).

Grocery Retail

The analyst noted that, while Wal-Mart Stores, Inc. (NYSE: WMT) has been competing with Kroger in the grocery retail space for quite some time, Target Corporation's (NYSE: TGT) dissatisfaction with its food retail returns have led it to prepare a bigger push in the arena – although this hasn't been confirmed by the company.

The Innovation Issue

"When you look at the one differentiating factor with Kroger, it's a technology and an innovation thing,” Graja continued. "For many years, they were way in front of just about every retailer in using big data to analyze customer shopping preferences and to offer very targeted coupons. That drives sales, and the thing that it does especially well, is that they can offer you personalized coupons on what you want to buy without going out and advertising in the big circular what the sales are and sparking a price war."

The Edge

The analyst then went into the various elements that provide Kroger with an edge over other retailers. It’s all about service: a faster check out than big box retailers, lower prices and a more pleasant shopping environment.

The other big differentiating issue is Kroger’s “very smart attention to capital,” the expert continued. “What they found is that they can dense up in markets and, by increasing their market share in markets, they're able to leverage their transportation and their marketing expense in those markets. It boosts their return on assets and it boosts the overall return on capital in the company. They're beginning to aggressively deploy capital to do this and to exploit some of those opportunities.”

So, What’s Wrong?

Despite all of the praises above, shares of Kroger have lost more than 25 percent year-to-date.

"The transient issue I think is deflation,” Graja concluded. “That's what's weighing on the stock - deflation and the effect on the top-line. But I think that's largely transient.”

Image: Nicholas Eckhart, Flickr