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Stay Far Away From Kroger

Summary

Kroger has not made investors very happy, with the exception of a few years.

Nevertheless, the firm is doing perfectly fine and I foresee no issues with Kroger going forward. Yet, I don't see similar potential for investors.

Why do investors have patience with this firm?

Kroger (NYSE:KR) is one of the largest food retailers in the world. Large normally sounds like a pretty good thing. Yet, as has been shown in the world of academia, continuous growth can peak at some point where shareholder value gets destroyed. In the case of Kroger, shareholder value is exactly what I am looking for as investors haven't seen many consecutive years of positive return. In short, overall return of Kroger (besides 2013-2015) has been disappointing the last 15 years, which I consider a fair investment window for long-term investors.

(click to enlarge)

This article will cover a fundamental analysis of Kroger. I will specifically focus on the fundamental drivers impacting the share price.

Kroger: Where Is This Shareholder Value?

Between 1998 and 2013 the firm barely moved while the Dow Jones posted a moderate profit of 55%:

Straight after, Kroger went up like a rocket (for between 2013 and 2015):

Since 2015, the overall return has been utterly disappointing:

Shareholders must have shaken their heads many times when it comes to the share performance of Kroger. What's going on here? Let's look at some of the potential drivers of the last few years and see if it can tells us anything at all for the future.

Potential Fundamental Drivers Of Share Price

First, we look if anything had changed in volume over time. An increase in volume could indicate clear upward pressure.

There has only been an increase in daily volume between 2005 and 2010.

The 30-day average daily volume change did not increase over the booming years in 2013-2015:

Revenue & Profit Margin

The period that Kroger increased significantly in share price, during the same time the firm only saw a modest increase in revenue while profit margin remained stagnant:

The growth in share price stands in a complete different factor in contrast to revenue and profit margin. Yet, when we look at the period of 1998 - 2013, the 15 year run-up, revenue actually increased significantly in contrast to share price:

The offset seems incredible. Overall return was abysmal while revenue increased by 125%. This clearly indicates that revenue overall is less important to shareholders, but the practicality of the business -- how management runs it on a day to day basis -- is more important. For example cost control and shareholder repurchase programs could indicate whether or not Kroger has shareholder value to offer.

Cash and other metrics

Let's investigate other metrics which point more towards financial security, such as the Altman-Z score, ROE, FCF per share and the current and quick ratio:

As the chart clearly indicates...


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