Is Kroger (KR) a Recession-Proof Value Investment?

America’s largest standalone grocer Kroger (KR) is a cheap stock that pays a dividend but is it a recession-resistant value investment.

Kroger (NYSE: KR) could be recession-resistant because it sells a product people always need: food. People need to eat in any economy or level of inflation. Moreover, people are more likely to cook at home and buy groceries in a poor economy. Hence, there could be more demand for Kroger’s primary product: groceries.

Furthermore, Kroger sells hot food from many of its markets, which can be a cheaper alternative to restaurant meals. Plus, Kroger is a player in the growing grocery delivery and meal kit businesses, which a recession could boost. Notably, Kroger and the Ocado Group PLC (LON: OCDO) have opened an automated 60,000 square foot e-commerce facility in Miami to support delivery in South Florida, Supermarket News reports.

To explain, I think higher gas prices could increase the demand for grocery delivery because some people will want to limit driving. Delivery fees will not look so expensive when compared to $5 or $6 a gallon gas.

Is Kroger a Value Investment?

I consider the Kroger Co. (NYSE: KR) a value investment because it operates 2,726 grocery stores in the United States. Yet Mr. Market paid $48.45 for Kroger on 24 June 2022.

Notably, 1,613 Kroger stores had fuel centers in January 2022, Statista estimates. Another 2,257 Kroger stores had in-store pickup in January 2022. In-store pickup could allow Instacart, Grubhub (GRUB), Postmates, and other services to pickup groceries or hot meals from Kroger stores.

Additionally, Kroger fuel is often cheaper than other filling stations. In particular, shoppers can earn one fuel point for each $1 of groceries they purchase at Kroger stores in its loyalty program. Hence, high gas prices give people another reason to shop at Kroger.

Thus, Kroger has an enormous footprint that could make more money from rising gas prices. Yet it has a low stock price.

Kroger is an appealing dividend stock. For example, Kroger has scheduled eight 21₵ quarterly dividends between 1 September 2022 and 20 March 2024. Each Kroger share delivered an 84₵ forward dividend and a 1.73% forward dividend yield on 24 June 2022.

How Much Money is Kroger Making?

Kroger (KR) can make enormous amounts of money. For instance, Kroger reported $44.6 billion in quarterly revenues on 30 April 2022. Additionally, Kroger reported a quarterly gross profit of $9.648 billion and a quarterly operating income of $1.505 billion on 30 April 2022.

Kroger is experiencing impressive growth. For example, the quarterly revenues rose from $33.048 billion on 31 January 2022. Similarly, the quarterly gross profit rose from $6.673 billion and the quarterly operating income rose from $965 million on 31 January 2022.

Over the past year, Kroger’s quarterly revenues grew from $41.298 billion on 30 April 2021. Plus, the quarterly gross profit grew from $9.351 billion and the quarterly operating income grew from $805 million on 30 April 2021.

Impressively, Stockrow estimates Kroger’s revenues grew by 40.77% in the quarter ending on 30 April 2022. However, those revenues fell by -19.98% in the quarter ending on 31 January 2022. Those revenues fell by -22.85% in the quarter ending on 31 October 2021.

Is Kroger (KR) Recession resistant?

I do not consider Kroger (NYSE: KR) recession resistant because it had just $2.492 billion in cash and short-term investments on 30 April 2022.

The cash and short-term investments fell from $2.903 billion on 31 January 2022 and $3.320 billion on 30 April 2021. Hence, Kroger has less cash despite its revenue growth. Hence, Kroger has fewer resources to cope with the recession.

Similarly, Kroger’s quarterly operating cash flow is falling. Kroger reported a quarterly operating cash flow of $2.256 billion on 30 April 2021 that fell to $1.428 billion on 31 January 2022 to $1.102 billion on 30 April 2022. Plus, the quarterly ending cash flow fell from $2.309 billion on 30 April 2021 to -$467 million on 31 January 2022 to $1.382 billion on 30 April 2022.

Hence, Kroger is not recession resistant because its business is generating less cash. I think that could be problematic at a time of rising operating costs. In particular, Kroger needs fuel for all the trucks that haul the groceries to its markets. Plus, I doubt the vans that haul the delivery orders to Kroger customers are electric.

What Value does Kroger Have?

On paper, Kroger (KR) offers enormous value. For example, Kroger had $49.091 billion in total assets on 30 April 2022.

In contrast, Kroger had $13.639 billion in total debt on 30 April 2022. The Total debt fell from $20.44 billion on 31 January 2022 and $14.124 billion on 30 April 2021.

That means Kroger is less vulnerable to rising interest rates and inflation because it has less debt. However, Kroger has less cash, which could force the company to borrow money at higher rates to finance its operations.

Thus, Kroger’s recession-resistance is small. Moreover, Kroger is expanding at a time it has less cash and falling cash flows. I think that will force Kroger to borrow money at higher rates or sell assets.

In the final analysis, Kroger is a cheap stock but not a value investment because it has small amounts of cash. I think investors need to avoid Kroger until the company accumulates large amounts of cash. 

Originally published at https://marketmadhouse.com on June 24, 2022.