If you run a farmer’s market and sell your own produce, you would likely place your products in the most advantageous spot to maximize your sales.
This week’s Long Idea pick applies that same logic at a national scale. The company leverages control over its shelf space to grow its own private-label brands. At the same time, it is expanding and improving its digital capabilities through several new initiatives.
The good news for investors is that despite these two strong profit growth drivers, the company’s stock remains undervalued.
By leveraging the first truly-reliable AI for investing, we can identify these hidden gems across the entire market and deliver them to clients on a silver platter.
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This stock offers favorable Risk/Reward based on the company’s:
- 2nd largest grocery retail store footprint and market share in the U.S.,
- eCommerce and private-label brand growth,
- increasingly efficient stores,
- impressive dividends and repurchases supported by strong cash flows, and
- stock valuation that implies profits will never grow again from current levels.
High Quality Data Matters: Even in Grocery Stores
The company’s retail presence, along with over 20 years of investing in data science capabilities, provides another distinct advantage over smaller competitors: more data.
With more locations and foot traffic, the company can collect more data on consumer preferences, price sensitivity, promotion success and much more. The company can and does leverage the data in many ways to personalize customer experience, adjust its own private-label brands, and focus on the right areas to continue to grow its business. For instance, the company recently brought back paper coupons, in part because older shoppers were feeling “disenfranchised” with digital coupons. The company’s CEO noted on the latest earnings call that as a result, customer price perception “improved in nearly every division this quarter (fiscal 2Q26).”
We’ve long emphasized the importance of quality data, alongside the difficulty of acquiring quality data. There is no better data than that collected directly from the source. By owning and collecting its own data, the company removes middlemen and gets a read on exactly what its costumers do and don’t like.
Decades of Consistent Profit Growth
Despite some YoY fluctuations, the company has grown profits across nearly three decades. Since fiscal 1998, the first year in our model, the company has grown revenue and NOPAT by 6% and 7% compounded annually. See Figure 1.
More recently, the company’s NOPAT margin improved from 1.8% in fiscal 2020 (year-ended Feb 1, 2020) to 2.8% over the TTM, while it’s invested capital turns increased from 2.7 to 2.8 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) up from 5% in fiscal 2020 to 8% in the TTM.
Figure 1: Revenue and NOPAT: Fiscal 1998 – TTM
Sources: New Constructs, LLC and company filings
Ample Cash Flow Generation
The company’s ability to consistently generate quality free cash flow (FCF) provides a level of safety for its shareholder capital return plans and remains one of the reasons its stock provides quality risk/reward.
The company generated a cumulative $19.8 billion (28% of enterprise value) in FCF from fiscal 2018 through fiscal 2Q26. In the first two quarters of fiscal 2026 alone, the company generated $1.6 billion in FCF. See Figure 2.
The company has generated positive FCF in 24 of the 27 years in our company model.
The company’s large FCF generation allows the company to reinvest into growing its business and consistently return capital to shareholders. The company’s cumulative $19.8 billion in FCF is more than enough to cover its $17.8 billion in combined dividends ($5.3 billion) and share repurchase ($12.6 billion) payments since fiscal 2018.
Figure 2: Free Cash Flow: Fiscal 2018 – 1H26
Sources: New Constructs, LLC and company filings
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