<p>Last year I had something in common with the great Warren Buffett from Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B).
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What exactly was it? Hooks (NYSE: KR). I bought 100 shares last year for $ 2,549. Buffett bought more than $ 500 million.
The difference is that I sold mine in January for $ 2,870, after I received $ 46 in dividends. Buffett just acquired his.
I think we both saw the same things in Kroger. It is a grossly undervalued company that sells a fifth of its sales volume. It has 10% of the US food market, the other is Walmart (NYSE: WMT).
So why did I come out when Oracle of Omaha came in?
If you have not read my Kroger coverage regularly, you may not know that Kroger is not just a business. It contains lots. Oregon has Fred Meyer. In California it’s Ralphs and in Kansas it’s Dillons. Colorado has King Soopers. In North Carolina, it’s Harris Teeter.
Each of these companies is run separately. This also confuses reporters. Its decision to leave North Carolina for Harris Teeter was originally headlined by the local press when “Kroger leaves North Carolina.”
Kroger is starting to realize that this is stupid. It launched an advertising campaign in all these stores at the end of last year, under the slogan “fresh for everyone.” The implication is that in time the stores will become a chain, probably under the name Kroger.
The problem is that even this strategy is now out of date. Successful grocery stores, such as Texas HEB, have different formats for different markets. Wealthy customers may go to a Central Market store, Spanish-speaking customers may prefer a Mi Tienda store.
But after Kroger bought Mariano’s in Chicago in 2017, it turned the stores into Kroger locations. It destroyed the company’s unique identity for a gentle, middle-class resemblance.
Not so cheap
Kroger is “underpriced” because Kroger is poorly run. The company depends on report results on March 5. Earnings of 55 cents per share are expected on earnings of $ 28.8 billion. That is only 2% more revenue than for the same quarter last year. The dividend of 16 cents gives 2.2%. The stock is up $ 2.50 this month, largely on Buffet’s purchase.
During the fourth quarter, Kroger traded as low as $ 24 per share. Buffett is likely to have a price-to-profit ratio below 15 and his return is closer to 2.5%. But it is not likely that you will also make it unless Kroger makes significant changes.
These changes were anticipated by the company now known as Macy’s (NYSE: M). The then-bankrupt New York chain was bought by the Cincinnati-based Federated Department Store in 1994. In 2005, Federated’s regional stores took all of Macy’s names and Bloomingdale’s was retained as an exclusive brand.
This worked as long as the middle class continued to go to department stores. When such stores were abandoned, Macy’s had no choice but to go down. The market value of Macy’s is now $ 5 billion, on a subsequent sale of $ 25 billion. You may notice that it is the same price-to-sales ratio as Kroger.
The conclusion on Kroger Stock
Kroger shares can be a winning investment, but not until it undergoes a fundamental change.
It must get rid of regional fiefdoms and differentiate based on demographics. It must turn brand brands like Murray’s Cheese into quality symbols, as Target (NYSE: TGT) has done.
That’s not the kind of work Buffett does. These are the types of job hedge funds that Elliott Management is known for. If Buffett could recruit such a company to join him or sell his Kroger share to such a company, I would be a buyer.
But I’m not buying this Kroger.
Dana Blankenhorn has been a finance and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. At the time of writing, he did not own any of the companies mentioned in this story.