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Profits From Aisle Five

Friday, 5 Oct 2007 | 11:40 AM ET

Both supermarkets and the analysts who cover them have been talking up the threat of inflation and increasingly frugal consumers, but those problems don’t seem to have affected Kroger, Cramer said Thursday on Mad Money.

Aisle High Club
Following Mad Money host Jim Cramer's shopping list for a cheap supermarket stock.

Last quarter, Kroger , which operates 2,500 stores throughout the West and Midwest, beat earnings estimates by almost 12% and reported same-store sales growth (excluding fuel) of about 5%, which Cramer said is a big number for such a large, mature business.

Still, “the Bill Poole’s of the world expected inflation to hurt the supermarkets,” so the stock is down anyway. Cramer expects Kroger to return to prominence, though, on the strength of the grocer’s business. Here’s why:

Kroger is outcompeting its rivals. The almighty Wal-Mart rolled out its food initiative with barely a dent to Kroger’s bottom line. And Supervalu has faded into the background as Kroger gave its stores a face-lift and its food a boost in quality. As Cramer said: “Good products with good presentation is a recipe for success, and success is what Kroger has.”

There growth here is in the margins. Thanks in part to private food labels, or supermarket brands, Kroger’s margins are about 10% than they would be with national brands. Cramer said this could equal a “major multiyear move in this stock.”

Lastly, Kroger has a great buyback strategy. The grocer already bought back 3% of shares outstanding just last quarter, and it has enough funds set aside to buy another 3%.

Kroger is “something you don’t want to miss,” Cramer said. He recommended buying some KR before the sale is over.


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