Kroger or Shoprite

Which retailer would you invest in?

I recently posted on Twitter posing a question to my followers why one would invest in Shoprite trading at 19 times earnings when instead they could invest in Kroger trading at 16 times earnings. The responses to the post were a mixed bag with some supporting the notion and others strongly against.

The aim of the post was to highlight the importance of having a global lens when making investment decisions. As investors it Is always important to consider the opportunity cost when making any decision. You should also not only limit yourself to fishing in one pond but instead consider the global universe of investable stocks. 

So, lets examine the question further. The key theme behind opting for a stock like Kroger which operates in the US over Shoprite which operates in South Africa would be to diversify against the obvious problems South Africa are currently facing. The first being loadshedding. Loadshedding is tremendous challenge for retailers to navigate. First, they have to worry perishable stock spoiling resulting in write-offs of inventory and secondly, they have fork out enormous amounts on fuel to power generators. Pick n Pay recently released results with the key takeaway being that the company had to spend over a billon rand (R522 million to be exact) on diesel for generators. This a massive amount in the context of the company and accounts for roughly a quarter of profit before tax.

South African retailers have also had to deal with numerous challenges such the looting during the July 2021 riots and now are having to deal with a more finally strapped consumer as high inflation and rising interest rates have taken a big knock to South African consumers disposable income.  For context the median salary in South Africa is R26 032 a month compared to the median salary in the United States of $5 899 or R107 481 a month in ZAR terms. Because of this South Africa consumers are often a lot more price sensitive and retailers often have to keep prices low at the expense of margins.

So, with the narrative for the question out the way, knowing that Kroger trades at a lower PE multiple to Shoprite does this make it a better investment? Not necessarily, the quality of the business could make up for the valuation gap. This post is by no means a full in-depth comparison of the two retailers but here a few comparatives between the Kroger and Shoprite. 

Kroger:

Market Capitalisation: $35.32B

Price to Earnings Ratio: 16.09

Price to Free Cash Flow: 7.96

Price to Book: 3.52

EV to EBIT: 15.59

EV to EBITDA: 7.64

Revenue Growth (3-year annualized): 6.63%

Operating Income Growth (3-year annualized): 22.38%

Net Income Growth (3-year annualized): 10.59%

Current Ratio: 0.74

Interest Coverage Ratio: 6.42

Debt to Equity: 2.03

ROA: 4.55%

ROE: 23.02%

ROIC: 8.81%

Gross Margin: 21.43%

Operating Margin: 2.78%

Net Margin: 1.51%

Shoprite:

Market Capitalisation: R121.14B

Price to Earnings Ratio: 18.67

Price to Free Cash Flow: 10.01

Price to Book: 4.48

EV to EBIT: 11.74

EV to EBITDA: 7.65

Revenue Growth (3-year annualized): 6.97%

Operating Income Growth (3-year annualized): 22.91%

Net Income Growth (3-year annualized): 10.26%

Current Ratio: 1.26

Interest Coverage Ratio: 3.78 

Debt to Equity: 1.56

ROA: 6.69%

ROE: 25.11%

ROIC: 12.04%

Gross Margin: 24.11%

Operating Margin: 5.19%

Net Margin: 3.07%

Between the two companies which would you rather invest in and why? This article is not financial advice but is purely for information purposes. In light I full transparency I currently do not hold a position either Kroger or Shoprite. Invest safely.

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