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Kroger seen as take-over bargain

  • Bloomberg News
  • Published Tuesday, Feb. 7, 2012, at 12 a.m.

— For potential buyers, there may never be a better time to go grocery shopping in the United States.

Kroger Co., the largest U.S. grocery-store chain and parent of Hutchinson-based Dillon Stores, is trading at an 86 percent discount to its projected sales this fiscal year, leaving it cheaper than 99 percent of companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The Cincinnati-based company, which lost $4.7 billion in market capitalization during the last recession, is now valued at 10.8 times estimated earnings, the lowest level for a U.S. food retailer greater than $2 billion, the data shows.

Kroger, which has increased sales in every year since at least 1987 even as Target and Wal-Mart Stores grabbed market share from other supermarkets, may now become a target for retailers outside the U.S. or private equity firms, according to Northcoast Research Holdings. Valued at $13.7 billion, Kroger could still attract a takeover offer 30 percent above its current price, Point View Wealth Management Inc. said, making it the largest grocery acquisition on record.

“Of the traditional pure-play grocery stores, Kroger is the crown jewel,” David Dietze, president and chief investment strategist at Summit, N.J.-based Point View, which owns shares of Kroger, said . “They have a long consistent record of positive same-store sales performance. It’s timely to acquire Kroger because it’s cheap.”

Keith Dailey, a spokesman for Kroger, said the company doesn’t comment on rumor or speculation.

Kroger traces its roots back to 1883, when Barney Kroger used his life savings of $372 to open a grocery store in downtown Cincinnati. Since then, the company has grown to more than 2,000 Kroger supermarkets, selling Kroger brand food items such as ice cream, pasta sauce and fruit juice.

The company also operates retailers including the Fred Meyer grocery and department store chain, the Turkey Hill convenience shops and Littman Jewelers.

After losing $4.7 billion in market value during the recession, Kroger has lagged behind a rebound in consumer stocks. Since June 2009, when the 18-month contraction ended, shares of Kroger have gained just 4.9 percent, versus a 41 percent advance for the S&P 500 Consumer Staples Index.

While Kroger was able to boost sales through the recession, its profitability declined in each of the past five years as the company lowered prices to compete with discount store chains such as Wal-Mart.

Kroger earned 2.6 cents in operating income for every dollar of sales in the past 12 months, the least among U.S. food retailers with more than $2 billion in market value, according to data compiled by Bloomberg. The supermarket chain also has lower operating margins because it operates gas stations, a less profitable business, according to Charles Cerankosky, a Cleveland-based analyst for Northcoast.

Shares of Kroger are now valued at 0.14 times estimated sales of $95.8 billion for the year that started this month, data compiled by Bloomberg shows. That’s cheaper than 488 of 495 other S&P 500 companies with sales projections from analysts.

Kroger is also trading at 10.8 times projected profit of $1.3 billion for the current fiscal year. That’s about half the average for five U.S. food retailers with market capitalizations of more than $2 billion. Both the earnings and sales numbers for this year would be records, the data show.

Food retailers outside the U.S. have bought American grocery chains in the past and some may be interested in acquiring Kroger if they are seeking further investment in the country as Europe’s sovereign debt crisis threatens its economy, Point View’s Dietze said.

Royal Ahold, the Dutch company that bought the Stop & Shop chain in 1996, also owns Peapod, the online grocery shopping and delivery service. Tesco, Britain’s largest supermarket company, owns the Fresh & Easy Neighborhood Market chain on the West Coast. Delhaize Group is the owner of Food Lion, Bottom Dollar Food and Hannaford.

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