It could also adversely affect their credit rating in the future.

Labor Relations - A majority of KR’s employees are covered by collective bargaining agreements and major contracts are set to expire in 2008. This could cost the firm as employers look to maintain or increase their benefits, of which the costs are increasing, making it harder for firms to maintain these benefits. While they have yet to experience any problems in their current negotiations, a setback in these could cause the company to sacrifice some profits in the near term.

Valuation

• P/E (ttm): 14.67x
• P/E (forward): 12.64x
• PEG: 1.53x
• Price/ Sales: 0.26x
• Debt/ Equity: 1.47x
• Dividend Yield: 1.30%

On a P/E basis it seems as though KR is undervalued, as it is trading near the lows it has had in the past few years. In comparison to some of its competitors, like CVS (CVS: 33.66, 0.00 (0.00%)) and Costco (COST: 64.16, 0.00 (0.00%)), it also seems to be trading at a discount. While Kroger may not be as big as these firms, their strong sales growth, market share and continued performance in a tough economic environment should merit their ability to trade at a higher P/E. With solid earnings growth and a consistent dividend the stock should continue to return value to shareholders in the long term. As long as people need their groceries and Kroger keeps compiling their sales data, they should be able to excel.

-Vinay Ayala

Disclosure: The author does not hold a position in any of the stocks mentioned.