Novice Investing - No Kroger Way Out

Date: Sunday 20th 2008f July 2008 12:45:03 PM

No Kroger Way Out - 07/11/2007

By: Hari Wibowo

Kroger Co. (KR) had been on a tear this past year. Shares has risen from $ 21 to $ 28 lately. That does not seem like much but Kroger is in the grocery business, which hardly surprising. With market capitalization of $ 19.8 Billion and $ 66 Billion in annual sales, Kroger will be hard pressed to find ways to grow earning in a meaningful way. Back in August 2006, we made several targets for Kroger to acquire. They are: Whole Food Market Inc. (WFMI), Rite Aid Corp. (RAD) and Sysco Corp. (SYY). All of them had changed during the course of the last twelve months. Let's go one by one with each.

Whole Food Market has stumbled badly over the past year. With its organic offering, Whole Food is expected to grow its business quite rapidly for the health-conscious elder people. However recently, Whole Food has taken a breather in terms of earning growth. It tries to revive the momentum by buying smaller rival Wide Oat Markets Inc. (OATS). But then, CEO John Mackey's memo regarding price increase in certain market, had made it to the mainstream. Now, the Federal Trade Commission (FTC) has been keen to block the merger. With that, we believe Whole Food might be more inclined to sell to larger rival than to focus itself as independent company.

Rite Aid has done well despite getting more leveraged and acquiring Jean Coutu stores. We thought it would weaken Rite Aid somehow due to the additional debt load it took but so far Rite Aid has weathered it well. It remained to be soon if the trend can continue. With price tag of $ 3.3 Billion + $ 3.1 Billion in debt, Rite Aid is slightly more expensive than Whole Food Market now. However, being in the pharmacy industry, Rite Aid is expected to deliver decent revenue growth for the foreseeable future.

Sysco is the biggest of the three and the one that we covered less. With roughly equal market capitalization as Kroger, it would take a lot of good will to make the acquisition works. Further, Sysco is in the lower growth food industry and combining the two would only be sensible if the two companies are complimentary to each other.

Financially, Kroger is in no hurry to make acquisition. Further, it had stemmed its market share loss from Walmart's entrant into grocery early in the decade. Investors believe that Kroger can innovate enough within the grocery space to overcome the retailer's giant threat. While Kroger does not have the balance sheet ( $ 803 Million cash versus $ 6.15 Billion in debt), its operational cash flow is quite sufficient to cover interest payments and several unexpectedly bad quarter. Perhaps if either Whole Food or Rite Aid dropped lower in value, Kroger might want to acquire one of them. In the meantime, Kroger is in no hurry to make a deal.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Kroger Co. (KR) or any other securities.

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