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Tickers in this Article: KR, WMT, KO, PG, CL
Share prices of consumer staples firms have lagged the return of the S&P 500 over the past week as investors became more optimistic that government stimulus plans will help lift the domestic economy out of a prolonged funk. The rally may prove short-lived, however, as many experts don't expect a recovery until at least mid-2009, which would make the current recession the longest in the past four decades.

In other words, it may be a good idea to use market volatility to your advantage and pick up stocks of firms whose earnings tend to hold steady during downturns in the business cycle. Firms like Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), Coca Cola (NYSE:KO) and retailer Wal-Mart (NYSE:WMT) come to mind as solid consumer goods plays, but I think grocer Kroger (NYSE:KR) is a much more interesting story right now. (To learn how these companies make their money, read A Guide To Consumer Staples.)

Why Kroger Makes Sense
Grocery-store operators are especially reliable given that there are few necessities as basic as food. Kroger reported third-quarter results yesterday that confirmed it is holding up just fine in a tough economy. Total quarterly sales advanced 9% to $17.6 billion on the back of 5.6% same-store sales growth, or 7.8% when including the sale of fuel at on-site gasoline stations.

Growth was boosted by a higher percentage of private-label brands, which garner higher profit margins for Kroger, as well as increased consumer cost conscientiousness as they save money by eating at home. This proved sufficient to offset higher product costs, which have since moderated as commodity inflation for key inputs, such as corn, reversed course along with the overall economy.

Reported profits were flat but would have increased about 5% to $253.6 million, or 39 cents per share, when stripping out one-time hurricane insurance deductible charge in the current quarter and tax benefit in last year's quarter. Kroger's net profit margins are razor thin (1.35% during the third quarter), but it is able to boost bottom-line trends through a constant focus on lowering costs and a steady share buyback program.

Indeed, during the conference call CEO David Dillon cited Kroger's focus on "low prices, quality products, and providing a convenient one-stop solution" for its customer's daily needs.

Bottom Line
Smart management has allowed Kroger to achieve steady results year after year, and while the stock is no steal at about 14 times earnings expectations for full-year 2008, investors can count on a high degree of downside protection as the economy works to regain its footing.

Learn how to analyze forward looking numbers in Great Expectations: Forecasting Sales Growth.

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