Thursday, May 19, 2016

Kroger, On A Hiring Binge, Is A Buy

This idea involves risk.  Talk to your financial adviser before doing anything.  Also, I could be wrong about this.  

     The current rally – which started in 1Q09 -- is getting a bit long in the tooth.  Not only is technical analysis arguing against purchasing equities, so is the current earnings environment, where overall corporate profits have declined in 4 of the last 5 quarters.  Finally, recent economic numbers, such as last months’ below estimate 160,000 job gains or the weak 1Q GDP print – add to the concern.  While recession calls are premature, the macro-environment is weak.

       At minimum, stock analysts should look for companies in economic sectors with steady growth profiles such as the food and beverage sectors:

In the last 20 years, there are only two periods of contraction, each lasting less than a year.  These sales are the backbone of the consumer staples sector, represented by the XLP ETF.  Below are three charts that show this ETF’s technical picture: 

 Although both the daily chart (top chart) and weekly chart (middle chart) recently printed negative candles, they remain in uptrends.  The ETF’s advance/decline line (bottom chart) is rising.   

    The Kroger Company is the largest grocery store by market capitalization; it is slightly over 3 times the size of its nearest competitor Whole Foods.  Kroger’s growth is consistent: their 5-year average revenue growth rate is 6%-7%, while the 10-year average is a solid 6%.  Due to razor thin net margins that average between 1%-1.5%, the company needs to aggressively manage its operations. Thankfully, their cash conversion cycle dropped from 10.75 days in 2010 to 7.28 in 2015, their inventory turnover ratio has been a consistent 14-15 for the last 4 years and the days of inventory on hand has been a steady 24.2-25.2 since 2012.  These numbers show a strong organization-wide discipline, which the company’s thin margins and hyper-competitive sector require.

     A stock trading near a 52-week low needs a buying catalyst.  Thankfully, the company just provided one:

Supermarket chain Kroger is going on a huge hiring spree. Its family of stores is slated to hire people for 14,000 full-time positions, the company announced Tuesday.

Kroger said it will hold interviews across the U.S. on May 14 to fill the positions. Interested candidates can apply online and then show up at a location on Saturday for the interview.

“We have openings across the country for friendly, hard-working associates to join our team,” Tim Massa, Kroger’s group vice president of human resources and labor relations, said in a statement. 
“We are looking for people who are passionate about making a difference for customers and communities—and want to do it in a fun, team environment with great benefits and advancement 

Next to COGS, labor is the company’s biggest expense.  The only reason they would increase their workforce at this pace is if they already had the sales reported or strongly believed they were coming.  This is especially true in an environment where a larger number of states and municipalities are increasing the minimum wage. There’s no other explanation for a hiring wave of this magnitude. 

     Let’s face it: groceries stores lack the sizzle of the next “big thing.” They are boring, stodgy businesses that perform a basic function for their communities.  But Kroger is a dependable performer that has an impressive control over their operations.  Their current price level is attractive and their recent hiring announcement indicates sales growth is probably on the way.