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Kroger (KR) Down 6.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Kroger (KR). Shares have lost about 6.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Kroger due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Kroger’s Q3 Earnings Surpass Estimates, Increase Y/Y

The Kroger Co. reported third-quarter fiscal 2018 results, wherein both the top and bottom lines surpassed the respective estimates for the third successive time. However, identical sales, without fuel, marginally fell short of analysts’ expectations. Moreover, gross margin continues to contract. Further, in spite of reporting better-than-expected results, management maintained its full year adjusted earnings per share view.

Let’s Introspect

The company delivered adjusted earnings of 48 cents a share that beat the Zacks Consensus Estimate of 43 cents and increased 9.1% from the prior-year quarter on the back of solid fuel margins and Restock Kroger program. This Cincinnati, OH-based company continues to envision adjusted earnings in the range of $2.00-$2.15 per share.

However, the company revised its GAAP net earnings view to $3.80-$3.95 per share from its previous range of $3.88-$4.03 owing to the market value adjustment of 9 cents a share for investment made in Ocado.

Total sales declined marginally by 0.3% to $27,672 million from the prior-year quarter but came ahead of the Zacks Consensus Estimate of $27,557 million. Excluding fuel, the convenience store business unit divestiture and the merger with Home Chef total sales jumped 1.7%. Digital sales surged more than 60% during the quarter under review.  The company’s identical sales, excluding fuel center sales, grew 1.6%. For the second half, the company expects identical sales growth excluding fuel to be similar to the first half.

We note that gross margin contracted 80 basis points to 21.6%, after shrinking 40 basis points in the preceding quarter. Meanwhile, excluding fuel and the LIFO charge, gross margin fell 91 basis points during the quarter under review, after declining 36 basis points in the second quarter. Management hinted that gross margin rate reflected price investments, higher transportation costs and growth of the specialty pharmacy business.

Kroger Ups the Retail Game

The grocery industry has been undergoing a fundamental change, with technology playing a major role and the focus shifting to online shopping. Kroger has taken stock of the situation and is in the process of giving itself a complete makeover. The company is expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. The company’s “Restock Kroger” program is also gaining traction.

Kroger launched a new apparel brand, Dip in more than 300 Fred Meyer and Kroger Marketplace stores. Moreover, Kroger Personal Finance witnessed record profit, while Kroger Precision Marketing revenue soared more than 150% year to date. Also, the company has entered into a partnership with Walgreens to explore new ways to reach consumers. The company will now sell around 2,300 products at 13 Walgreens locations via Kroger Express, a store-in-a-store concept. Moreover, Kroger also expanded its Home Chef Express meal kits in 65 Walgreens locations in the Chicago.

Other Financial Aspects

Kroger ended the quarter with cash of $393 million, total debt of $15,018 million, and shareholders’ equity of $7,610 million. Total debt increased $171 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.72 compared with 2.57 in the year-ago period. In the trailing four quarters, the company bought back $2.3 billion of shares and paid $435 million in dividends. The company had approximately $546 million remaining under its share buyback program.

Management continues to project capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be approximately $3 billion for fiscal 2018.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

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VGM Scores

Currently, Kroger has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Kroger has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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