If you have stepped into a Fry's in Arizona, a Dillon's in Kansas, a Fred Meyer's in Oregon, a Ralph's in California, a King Sooper's in Denver or a Harris Teeter's in North Carolina, you are a Kroger shopper. Kroger owns almost 30 different retail names ranging in size from the equivalent of Walmart (WMT - Get Report) Supercenters to convenience stores with gas such as Turkey Hill Minit Markets, Kwik Shop and Loaf 'N Jug.
If you bought Costco (COST - Get Report) shares 10 years ago your investment is up over 200%. If you had bought Kroger instead, you've also more than tripled your money. Kroger's five-year performance exceeds Costco's, and so far this year it's no contest -- Kroger is up 30%, while Costco is up 5.8%.
Shares of Cincinnati-based Kroger were trading at $51.30 on Thursday morning, down 1.1%, after the company reported that its earnings for its fiscal second quarter ended on Aug. 16 rose 9.5% to $347 million on an 11.6% increase in sales to $25.3 billion. Some of the sales growth came from Kroger's acquisition of Harris Teeter in January.
The company also raised its same-stores sales growth estimate for its fiscal 2014 ending in February to a range of 3.5% to 4.25%. Its previous estimate was for growth of 3% to 4%. It also edged up its profit forecast for the year to earnings of $3.22 to $3.38 per share, from its previous estimate of $3.19 to $3.27.
Kroger owns 15 dairies, six bakeries, five grocery plants and two meatpacking plants, and it operates three different types of private labels, including an organic label and brands tied to its various chains.
The company is known as a grocery chain, but what most investors may not know is that it is rapidly expanding into a full-line competitor to Target (TGT - Get Report) and Walmart (WMT - Get Report) , based on a model it bought with Fred Meyer in 1997. These marketplace stores carry toys, appliances and home furnishings, and they may include pizza stands and coffee bars.
CEO David Dillon may be thought of the next Sam Walton, Walmart's legendary founder. Dillon left as CEO at the start of the year and will retire as chairman in January, but not before issuing a Walton-like parting shot to the effect that CEO salaries are too high.
Successor W. Rodney McMullen is a Kroger lifer credited with the integration of Fred Meyer into the company. That deal also brought in Ralph's in California, Smith's in Utah and QFC in Washington.
Kroger's multi-chain strategy also means it is less controversial than Walmart is. When a developer in Atlanta announced that his big-box development along the Beltline would be anchored by a Kroger rather than a Walmart, opposition melted away.
This should be Kroger's first year with revenue over $100 billion. That is almost the same as Costco, which had $105 billion in revenue for its most recent fiscal year, but still much less than Walmart's $469 billion.
Kroger still has no grocery operations in the Northeast or warehouse club operations, but it now has most of the Walmart strategy in place, and continues to fly profitably under the radar, meaning that its stock's superior performance may fly under the radar, too.
At the time of publication, the author owned shares of Costco.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates KROGER CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate KROGER CO (KR) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
- You can view the full analysis from the report here: KR Ratings Report