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Summary of Operations
Kroger is the second-largest grocer in the United States (also the owner of Harris Teeter). While mainly a retailer for other food producers, it does have its own store-brand lines for some of its products. It also owns many small grocers that operate under their local names.
Strategy
The business is partly vertically integrated with its own store brands that are either produced by Kroger directly or by contracted third parties to Kroger’s specifications. Otherwise, Kroger mainly sells goods provided by many different brands. Further vertical integration comes from fuel sales on site to make stops more convenient and integrated.
Otherwise, the company steadily expands horizontally (about 3% compounded growth) by building or acquiring new stores (occasionally acquiring other grocers). Digital sales and data analysis have been lowering costs and enabled Kroger to use its scale to meet customer needs like never before, allowing them to maintain revenues in the face of COVID.
Growth and the Future
Kroger is a profitable and stable company. Its size, customer appeal, and the perennial need to eat food give it a decent moat to grow steadily over time, but this is unlikely to be a multibagger. Its frequent share buybacks are where most of the returns will come for those who are long on the company, and since it is rarely exuberantly priced, the buybacks are unlikely to be wasted cash.
Valuation
Growth Assumptions: 3%
Intrinsic Value Per Share: $25
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