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Kroger's Strategic Growth: Harris Teeter Acquisition and Digital Coupon Innovations

Kroger, employing 343,000 employees and headquartered in Cincinnati, operates primarily as a combo supermarket with diverse formats like Fred Meyer and Price Impact Stores. Recent stock price fluctuations surrounding the potential acquisition of Safeway and the completion of the Harris Teeter deal, projected to exceed $100 billion in annual sales, highlight its aggressive growth strategy. Additionally, Kroger's venture into digital coupons aims to enhance customer engagement and deliver cost savings, with financial implications expected in the upcoming 10-K report.

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Kroger's Strategic Growth: Harris Teeter Acquisition and Digital Coupon Innovations

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  1. The Kroger Company Module8

  2. Kroger • 343,000 Employees • Headquarter in Cincinnati • Primary store is “combo store” (supermarket) • Multi-department (Fred-Meyer), Marketplace, Price Impact Stores (Food for Less) as well • Last Saturday in January • Comparables are Whole Foods, Costco, Walmart

  3. Trouble So Far -Tough to find comparables with grocery stores so far. Whole Foods and Costco have not seemed to fit, Walmart is a possibility. -Has to do with business models -Stock price hovered around $38 but now a high of $43 (explained next slide) dollars using comparables got prices as high as $140 (Sales)

  4. Rumors • -Kroger stock has soared lately due to rumors of buying Safeway • -Typical for “go shop” periods • -21 days • -260 million in cash last year (9.4 B offer already) • -150M fee • -What would it mean for Kroger Debt (already gone from 6b to 9b)

  5. Harris Teeter Acquisition • -Results should really be seen in the upcoming 10-K to be released March/April • -Acquisition should propel Kroger over 100B • in annual sales, only 21 companies in the Fortune • 500 hit that mark • -Kroger expects $40 to $50 M in cost savings • Within the next five years • -Kroger financed the deal through debt and • Commercial paper • -Harris Teeter shareholders got a 33% premium • -Kroger assumes $100M in Harris Teeter debt, • Intends to continue dividend and manage FCF • To reduce leverage Source: News Observer

  6. Sales Forecast • -Starting in 2019 I stabilized growth off at 2% • -Harris Teeter acquisition will carry growth forward for a few years but must stabilize at somepoint

  7. Residual Calculations

  8. Abnormal Enterprise Growth

  9. You Coupons • -February 11th, Kroger bought You technology coupon services, the leader in digital Coupons and promotions • -Financial terms were not disclosed but found the deal interesting as an attempt by Kroger to go mobile in a way • -Kroger sees digital coupons as something that has tremendous growth and customers have downloaded over 400M digital coupons in the last 12 months • -Hopefully I can discover some financial impact when the 10-K is released

  10. Conclusion • -Grocery Stores are much harder to compare than I originally thought • -Enterprise value could really increase with Harris Teeter deal and debt taken on • -Finding companies with similar characteristics besides just the leaders in market cap is what seems to be important for valuation purposes • -Based on valuations I recommend a BUY ($70) • -Is debt a concern moving forward based on business model?

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