Investment strategy: Value brands strike again
Today's Financial News - Posted March 10, 2009
Kroger (NYSE:KR) investors are seeing strong gains today as generic brands prove their worth. The recession may be hammering most retailers, but select niches are doing very well.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is the battle of the tightwads these days. Yesterday it was McDonald’s (NYSE:MCD) and its value-menu offerings grabbing the attention of investors. Today it is Kroger (NYSE:KR) and its private-label product lineup.
There is a saying in the grocery industry. “Shoppers need to buy groceries, but they do not need to buy groceries from you.”
In an economic downturn like this one, the line could not ring more true. With groceries stores of all sizes and styles popping up seemingly on every suburban street corner, consumers have more choices than ever.
The grocers that have managed to keep their product offerings and prices in line with consumer demands are doing well. The companies that have not been so dynamic are failing.
Fortunately for its investors, Kroger has used its private labels to offer cost-conscious shoppers some high-quality alternatives at lower prices.
During the recent boom cycle, some consumers were embarrassed to be caught in the checkout line with a cart full of generic brands. But in today’s recession, penny pinching and coupon clipping is a new fad. Fortunately for guys like me, it’s hip to be square.
Ramen Noodles: the ultimate recession-proof product
During its latest fiscal quarter, Kroger reported a net income of $349 million or $0.53 per share on revenues of $17.26 billion. Profits were up 8% over last year’s figure of $322 million. That is fantastic growth during one of the worst quarters in the nation’s recent economic history.
Much of the expansion is due to the rising popularity of Kroger’s private label or store brands, which rose to a record-breaking 35% of grocery unit sales. Not only will this sort of growth increase the company’s margins, it will create brand loyalty, one of the most important factors to a grocer’s success.
A shopper can buy their groceries just about anywhere. But it takes something unique and compelling to keep them coming back for more. Kroger seems to have found a niche with its brands, “Value” and “Private Selection.”
So far today, shares of the company are up by about 10% on the strong earnings report. Going forward, this is a stock investors should be willing to buy on dips. Anything below $20 per share is a steal and below $22 offers plenty of strong short-term profit potential.
As the recession lingers, investors are learning the power of a value-based business model. The differentiators had their run a few years ago, now it is time for companies like Kroger, McDonalds and Wal-Mart (NYSE:WMT) to shine.
As long as consumers keep a lock on their wallets, tightwad magnets like these companies will do good business. Investors are already seeing the potential.
Next Article: Geothermal Energy: This company is a stimulus magnet!
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