Kroger Ups Cap-Ex, Explores New Markets

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Kroger Co., the nation’s largest pure player supermarket retailer and a growing presence in the Mid-Atlantic region, unveiled its long-term strategy for enhanced growth at its investor conference in New York last month. 

Building on strong momentum over the past five years that has been gained from its “Customer 1st” strategy, the Cincinnati based retailer said it will invest in a targeted expansion strategy to increase square footage and store penetration in its existing markets and will look to enter new markets.

While chairman and chief executive David B. Dillon provided no specifics about new market penetration, obviously certain Supervalu assets become a potential destination, especially the Jewel division in the Chicago area, which currently represents a nice geographic hole in the Kroger donut. Even companies like Farm Fresh and Shoppers Food & Pharmacy would fit the “new and existing expansion” approach Kroger is targeting.

Seeking new market growth would represent a marked change from Kroger’s very conservative growth profile which typically has focused on building local market share through price and customer service.

And nobody can argue with the results – for the past five years, no other pure supermarket chain has performed at a higher level. However, much like other supermarket operators, Kroger’s stock price has languished ($24.54 per share) and it has remained planted its established market (its last major market expansion was in 1998 when it acquired Fred Meyer, giving the chain a major West Coast presence).

Kroger also announced that it raised its long term, fully-diluted earnings per share growth target from 6-8 percent to 8-11 percent, plus a current dividend of 2.5 percent. To support its growth strategy, Kroger expects to increase capital spending by an incremental $200 million annually and increase return on invested capital.

At the meeting, Kroger’s board of directors approved a $500 million share repurchase program, replacing the existing authorization that had approximately $340 million remaining.

During the conference, senior Kroger executives highlighted the significant opportunities the company sees across the broad food retailing market, which extends beyond traditional supermarkets and includes discount stores, drug stores, restaurants and many others.

“Our proven strategy and market position provide a tremendous platform to accelerate growth and increase value creation for Kroger shareholders,” Dillon said.  “We are confident that Kroger’s unmatched knowledge of the customer and disciplined approach to deploying capital will drive growth at attractive levels of return. We will continue to use our strong free cash flow to deliver shareholder value through actions such as our recent 30 percent dividend increase and the continuation of our substantial share repurchase program.”

Other Kroger executives who participated in the conference included: Cindy Holmes, director of investor relations; J. Michael Schlotman, chief financial officer and senior VP; W. Rodney McMullen, president and chief operating officer; Jeffrey D. Burt, group VP-perishables merchandising and procurement; and Michael J. Donnelly, senior VP-merchandising.