A Financial Analysis on The Kroger Co. and Safeway Inc.

The Kroger Co. and Safeway Inc. are among the companies listed on the New York Stock Exchange. As such, shares of these companies have been offered to the public for ownership and are presently traded in the bourse. To be able to make a wise decision as to whether or not a prospective investor should buy into The Kroger Co. and Safeway Inc., sufficient information regarding their financial condition and operational well-being will have to be available and then looked into.

With the shares of The Kroger Co. and Safeway Inc. being currently traded in the stock market, present and prospective investors have to monitor the state of things, the rate of growth, and the progress and prospects of the two companies. As stated in its 2007 Fact Book, The Kroger Co. is one of the largest retailers in the United States based on annual sales, holding the #26 ranking on the Fortune 100 list. Kroger was founded in 1883 and was incorporated in 1902. The company 2007 Fact Book further states that at the end of the fiscal year 2006, Kroger operated (either directly or through its subsidiaries) 2,468 supermarkets, 631 of which had fuel centers.

Approximately 39% of these supermarkets were operated in company-owned facilities, including some company-owned buildings on leased land. Kroger Co. also manufactures and processes some of the food for sale in its supermarkets. As of February 3, 2007, the company operated 42 manufacturing plants. Congruent to lines in the 2007 Fact Book, the company website says that The Kroger Co. ps many states with store formats that generally include grocery and multi-department stores, convenience stores, and mall jewelry stores.

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They operate under nearly two dozen banners, all of which share the same belief in building strong local ties and brand loyalty with their customers. With its headquarters located in Cincinnati, Ohio, Kroger employs approximately 310,000 full-time and part-time associates. Meanwhile, Safeway Inc. is one of the largest food and drug retailers in North America. According to the company’s 2007 Fact Book, at year-end 2006, Safeway Inc. operated 1,761 stores I the Western, Southwestern, Rocky Mountain, Midwestern and Mid-Atlantic regions of the United States and in Western Canada.

In support of its stores which have increased in numbers through the years, Safeway has an extensive network of distribution, manufacturing and food processing facilities. The 2007 Fact Book further relates that through its subsidiaries, Safeway operates GroceryWorks. com, an internet grocer doing business under the names Safeway. com, Vons. com and Genuardis. com. Blackhawk Network Holdings, Inc., a subsidiary of Safeway, provides third-party gift cards, prepaid cards and sports and entertainment cards to North American retailers for sale to retail customers. Safeway as well holds a 49%-interest in Casa Ley, S.

A. de California Vons, which at the end of the year 2006 operated 127 food and general merchandise in Western Mexico. This company holding serves to further establish Safeway’s place in the food and drug retail industry. The company’s Annual Report claims that thanks to the hard work and dedication of their associates, Kroger delivered consistently strong results in 2006, exceeding their original expectations for both identical supermarket sales growth and earnings per share. Their fiscal 2006 results illustrate the balance between margin and sales growth that is the foundation of Kroger’s strategic plan.

As cited in the 2007 Fact Book, approximately 22% of Safeway private-label merchandise is manufactured in company-owned plants, and the remainder is purchased from third parties. The company also manufactures private-label and national brand products for a variety of domestic and international customers. Indeed, Safeway has come a long way since 1986 when the company was initially acquired and taken private via a leveraged buyout by partnerships formed by Kohlberg Kravis Roberts & Co (KKR) and Safeway’s senior management. There are many other relevant details about the company found in the 2007 Fact Book.

Safeway’s main corporate office is located at 5918 Stoneridge Mall Road in Pleasanton, CA. With 207,000 workers in its employ, the company’s operating strategy is to provide value to its customers by maintaining superior store standards and a wide selection of quality products at competitive prices. To meet the needs and high standards of today’s busy shoppers, Safeway presently emphasizes their making available the following offerings: high-quality meat and produce, in-store bakeries, deli and foodservice areas and outstanding floral and pharmacy departments.

The Company’s store employees also have been trained to deliver superior service to customers to make their experiences more enjoyable. The resulting financial operating results of the company, therefore, come as no surprise. The 2006 Annual Report describes 2006 as another outstanding year for Safeway. Building on the momentum of their dramatic improvement in 2005, they achieved robust earnings growth driven by strong sales gains and significant operating and administrative expense leverage. Safeway’s net income was $870. 6 million in 2006 compared to $561.

1 million in 2005, while their total sales rose by 4. 6% to $40. 2 billion in 2006 from $38. 4 billion in 2005. More financial details are to be covered by this paper through a thorough analysis of the financial statements of the two companies, Kroger and Safeway, for the years 2006, 2005 and 2004. One very important thing that investors look into before buying shares of a company is the capacity of the company to generate profits, which would be translated as returns for the investment of the shareholders in the form of dividends – whether cash or stock.

To evaluate the profitability of a company, the following rates or ratios are computed and given a lot of consideration in deciding to invest or not to invest: the profitability and margin ratios and the ownership ratios. Based on the financial statements of the two companies, the ratios show that from 2004 to 2006, The Kroger Co. ’s gross profit margin ratios have declined – 25. 33% in 2004, 24. 75% in 2005 and 24. 20% in 2006. However, , its net profit margin ratios – which matter more - have improved.

Computed net margin ratios were 1. 58% in 2005 and 1. 69% in 2006, as compared to the net loss incurred in 2004. The decreasing gross profit margin ratios for 2006, 2005 and 2004 mean that despite the upward trend of the sales figures of The Kroger Co for those years, the increases in the cost of sales turned out to overtake the positive effect of the increased sales figures. Thus, despite the increase in the figures of the gross profits, the resulting gross profit margin ratios turned out to be declining year-on-year.

However, the financial statements of Kroger from the years 2004 to 2006 show that the operating and administrative costs, together with the interests and taxes that fell due were decreasing as a function of the total sales. Thus, the net profit margin ratios indicate improvements year-on-year: from a net loss or zero-net profit margin ratio for 2004 to a net profit of $1,115M or 1. 69% net profit margin ratio in 2006. On the other hand, the gross profit margin ratios of Safeway Inc. were 29. 58% in 2004, 28. 93% in 2005 and 28. 82% in 2006.

Its net profit margin ratios were 1. 56% in 2004, 1. 46% in 2005, and 2. 17% in 2006. Despite the decreasing gross profit margin ratios for the years 2004 to 2006, the more important thing to note is the increasing net profit margin ratios during those same years. Safeway also has consistently yielded profits during those past three years, while Kroger’s operating results in 2004 was a net loss. Based on the profitability of operations, therefore, especially if the most recent year – 2006 – is to be considered, Safeway turns out to be more attractive than Kroger.

Given also the consistency of the delivery of positive earnings by Safeway, it is the safer bet as the company to end up with income figures in 2007. But then, there are other parameters to consider as well. The earnings per share (EPS) of a company is an important indication of its profitability. It can easily be compared to the EPS figures of other companies, then it is a handy means for investors and stockholders to see the amount they have earned for a single share of stock. For the years 2006 and 2005, the EPS of The Kroger Co. is $1. 54 and $1. 31 respectively.

Krogers incurred a loss in 2004, so the company’s earnings per share become instead a loss per share amounting to $0. 14; consequently, the price-earnings ratio for that year cannot be named. Meanwhile, the EPS of Safeway Inc. for the years 2006, 2005 and 2004 are $1. 94, $1. 25 and $1. 25, respectively. Between the two companies, Safeway Inc. generates a higher average EPS for the three years and specifically for the most recent year, 2006. Accordingly, Safeway also has declared and paid more cash dividends.

While Kroger paid dividends worth $0. 195 in 2006 then none in 2005 and 2004, Safeway paid dividends in both 2006 and 2005, amounting to $0. 2225 and $0. 15, respectively. Thus, on the basis of earnings per share and then of the cash dividends paid out, the scales are again tipped in favor of Safeway. The price-earnings ratio is the ratio of the current price per share to the earnings per share (EPS) of stocks. In formula form, it is calculated as the price per share divided by earnings per share (EPS). With the calculation of the price-earnings ratio, financial analysts may overcome the difficulty of comparing different-priced shares of stocks.

By comparing the price-earnings ratio, one can easily see which stocks cost less for each invested unit of currency. In other words, the price-earnings ratio indicates how many units of currency are required to buy a unit’s worth of earnings. The price-earnings ratios of The Kroger Co. for the years 2006 and 2005 are $16. 79 and $14. 17. Meanwhile, those of Safeway Inc. is $17. 81 for 2006, $18. 93 for 2005 and $15. 67 for 2004. In terms, therefore, of the market values per dollar earnings, a Safeway share of stock is a bit more expensive than a Kroger share.

Still, the premium in the market price of the shares of Safeway is more than justified. Safeway is projected to reap higher sales in the coming years through its innovative ways of meeting the demands and needs of the customers. Their online grocery line is seen to bring in more loyal customers, and they are expected to grow in numbers year-on-year as shopping through the internet becomes a more popular option of busy people. The current ratio is a tool to test the company’s liquidity. No company can avail of long-term loans for expansion if it is proven that the company cannot even settle those with terms that are shorter than a year.

The higher the liquidity, the better for the investors and creditors of a company. The current ratios of The Kroger Co. for the years 2006 and 2005 are 0. 89 and 0. 96. In both years, it has turned out that the company’s cash and assets that were most easily convertible to cash were not sufficient to fully pay up those of its debts that were to fall due within a year from the fiscal year-end of the company. Meanwhile, the current ratios of Safeway Inc. for the same years – 2006 and 2005 – were 0. 77 and 0. 87.

Thus, it would seem that if liquidity were the primary concern of the one looking at the financial statements, Kroger would be the choice company to invest in. Companies, though, are not always advised to main high current ratios since it can mean plenty of investment or expansion opportunities forgone in preference of staying liquid. In this case, the current ratios of both companies being less than one (1. 00) should not be taken against them. On the other hand, the debt-equity ratio shows how much of the total assets of the company are provided by the stockholders’ investments and how much of them are provided by creditors.

The bigger this ratio is, the less attractive the company becomes for banks and lending institutions. The debt-equity ratios of Kroger for the years 2006 and 2005 are 77:23 or 335% and 79:21 or 376%. Those of Safeway are 65:35 or 186% for 2006 and 69:31 or 222%. Both do not meet the normal banking standard of 60:40. However, of the two companies, Safeway turns out to be the one less heavily indebted to creditors and therefore relies more on the investments of its stockholders for the needed financing of the company’s operations.

The credibility of the company management and the long-standing good records of the company as a borrower may prevail and become more than enough reasons for the release of loans of specific companies. This is true of The Kroger Co. , which remains a bet of creditors and investors in terms of being a viable vehicle of investment for their funds in the light of the needed safety for their money and then the equally important returns and yield that their investment must generate.

Based on all the foregoing, it is recommended that the money for investment be used to purchase shares of Safeway Inc. Purchase of SWY shares is seen as a conservative move that will bring in more yield as compared to less riskier investment options such as time deposits and treasury bills. The ways to reap returns through investing in SWY is by collecting regular dividends, and then to make money as well in the trading of stocks in the stock market.

References

2007 Fact Book of The Kroger Co. Company website of The Kroger Co. (www. thekrogerco. com) 2006 Annual Report of The Kroger Co. 2007 Fact Book of Safeway Inc. Company website of Safeway Inc. (www. safeway. com) 2006 Annual Report of Safeway Inc. Reilly, F. and K. Brown.

Investment Analysis and Portfolio Management. Orlando, Florida: The Dryden Press, 1997. Appendix: Financial Statements Figures and Analysis of The Kroger Co. and Safeway Inc. The following is the computation of the profitability ratios for the operations during the years 2004, 2005 and 2006 of The Kroger Co. and Safeway Inc.

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