In Focus

Foreseeing with the 4 C's

Call me crazy, but I think I'm in love with my grocery store. Depending on the week, I can spend hours there, from my once-a-week shopping spree to my daily pick-ups. Add to that my refills on my propane tank, prescriptions, the ATM machine, newspapers and magazines, and you can see why I need to love it. It's my home away from home. That's why I use the 4 "C" test for finalizing my grocer of choice. They are as follows:

1. Crabbiness  That's right, Chicks. I've gotten myself there, I'm in a hurry, my kids are wild and the last thing I need is a crabby butcher or checkout person. Friendly faces are a MUST for this Chick.
     
2. Cleanliness  This is huge, too. Are there more eyes on the potatoes than there are on Super Bowl commercials? How about insects swinging from limbs of broccoli? Sticky floors or filthy bathrooms? Look, I'm eating this stuff and feeding it to my family. A clean grocery store is sacred.
     
3. Cost  Obviously cost is important, but there are two ways to look at savings. I need to have either a choice of a low-cost name brand, or a great-tasting alternative private label. I look to avoid paying high prices, but am not willing to sacrifice flavor!
     
4. Convenience  Proximity is a bonus, but if the store two blocks from me doesn't meet the other three criteria, then they're out. I'll drive the extra miles to find a store better suited for me.

And there you have it. The absolutes of a grocery store. Take it from me, I'm a pro. I've lived in enough towns over the years to be able to say that. First thing on my list after "unpack?" Find a grocer. Which is exactly what I did when my family and I moved to Cincinnati, Ohio.

Kroger (KR:NYSE) is a Cincinnati-based grocer and #1 in the US. If you're not familiar with them where you live, perhaps you've heard of Fred Meyers, Ralph's, Smith's or Food For Less. Kroger's boasts ownership of 2,354 Supermarkets and Department Stores, 789 Convenience Stores, 389 Jewelry Stores, and 42 processing plants. Who knew? So besides meeting my stringent 4 "C" rules you'll never guess what else drew me to this terrific company...

Well, duh. After all, this is a website dedicated to Chicks and stock talk. Here's the deal. I consider the grocery store industry to be a stable one. Under the Chicks' Dozen question about whether an industry will survive and continue to grow, this is a no-brainer. But it is also considered an industry with slower growth, and here's why: People are pretty much consistent with their year-to-year spending at their local grocer. The stores will always have traffic, but ultimately it will be the same amount of traffic. New people move into town, but then someone else moves away. It all evens out at the end of the day. What puts Kroger on a higher plane than most others, is that its growth rate is the highest among the world's five largest retailers -- while its stock is the cheapest! This certainly sparks a Chicks interest!!

On March 15th, KR reported fiscal fourth quarter earnings that matched Wall Street estimates. Excluding one-time items, earnings rose to $400.7 million from $315.7 million a year earlier. And in another exciting move, the company reduced their debt $476 million last year to $8.28 billion. So what have they done that has made the difference?

Well for one, they've completely focused on their private label goods. At a time when consumers are literally counting pennies, cost savings is imperative. Kroger has introduced 200 private label goods, which works for the consumer and brings in a better profit for the store. Their profit margins on private labels are 35% as opposed to 25% profit margins on national brands.

Another strategic move has been the incredible number of acquisitions they've made. Most of you probably have a Kroger or one of their affiliates nearby. They want to be available at every turn, and they've done a great job of making that happen.

It is also interesting that they have bought into the jewelry market. When Fred Meyer Jewelers came to fruition back in 1973, it helped place Fred Meyer grocery stores in a more elite category. They decided they would add these full-service salons within the store and instantly developed a reputation for being fairly priced, low-pressure and good quality. Eventually they opened up mall stores and acquired Kay, Friedlander, Weisfelder, Hudson Goodman, Merksamer, Fox's, and Littman/Barclay Jewelers. With 389 Jewelers across the country, the earnings contribution is nothing to sneeze at.

Kroger's biggest rivalry comes from the giant discount stores like Walmart. To remain competitive, Kroger plans to boost sales through their natural foods departments, pharmacies, and continue to add gas stations in various areas. (They now have 77 and plan on having 150 to 170 by year-end.) Chairman and CEO Joseph Pichler feels as long as they can steadily improve operations with technology and logistics, they will be able to withstand the opposition.

KR is still predicting 16% to 18% earnings growth through fiscal 2003 and then 15% beyond that. They are currently trading around the $24 mark, with their 52 Week high being $27.93 and their 52 Week low being $14.06. So, A) That's not a bad price, even if it is closer to their high than their low. And B) 16% to 18% growth is pretty darn good. While many other companies are talking about slower growth or no growth, Kroger is optimistic about its future. In analyzing Kroger stores, I figure you can put the 4 "C" rules together with the Chicks' Dozen. You may just have a diamond in the rough.