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Kroger (KR) Adapts to New Normal Amid Coronavirus Crisis

Zacks Equity Research
·4 min read

Amid fears of the ongoing pandemic and resultant social distancing, retailers have been directing resources toward digital platforms, accelerating fleet optimization and augmenting supply chain. In fact, companies have been expanding delivery options and contactless payment solutions to provide a seamless shopping experience. No wonder, The Kroger Co. KR has been aggressively adopting strategies and making planned investments to cater to consumer demand and behavior in the new normal.

Impressively, this Cincinnati, OH-based company has prioritized its actions to resonate well with the prevailing crisis and burgeoning demand for necessary commodities. Clearly, a structural shift is being noticed from “food consumed away from home” to “food consumed at home.” Also, customers are opting e-commerce solutions for their grocery and other household essentials.

Let’s Introspect

Kroger has been making prudent investments to bolster omni-channel operations, improve supply chain and increase manpower to ensure swift customer service amid such challenging times. The company has been focusing on no-contact delivery option, low-contact pickup service and ship-to-home orders. It also continued to expand contactless payment solutions like Kroger Pay.

Driven largely by coronavirus-led demand, the company registered a sharp rise in sales during second-quarter fiscal 2020. We note that digital sales soared 127% during the second quarter of fiscal 2020, while pickup or delivery reached 98% of Kroger households (2,100 pickup locations and 2,400 delivery locations). This followed an increase of 92% in digital sales in the preceding quarter.



Clearly, Kroger, which operates in the thin-margin grocery industry, has been making every effort to strengthen position not only with respect to products but also in terms of the way consumers prefer shopping.

Its acquisition of Home Chef, the U.S. meal-kit company, and partnership with British robotics company, Ocado, in 2018 are noteworthy. The company is aggressively working toward more convenient grocery delivery options. In this regard, the company has started utilizing Nuro’s fully autonomous, driverless vehicles for grocery delivery services. The company also started accepting Supplemental Nutrition Assistance Program benefits for pickup orders.

Recently, Kroger’s delivery services wing — Kroger Ship — partnered with Mirakl, a leading software platform enabling B2C and B2B digital marketplaces. Mirakl's best-in-class marketplace solution and marketplace offering of third-party sellers are likely to add steam to Kroger’s ship-to-home assortment. The tie-up will enable addition of more than 50,000 items across multiple categories, including natural and organic, international food, specialty items, housewares and toys.

Bottom Line

Management is leaving no stone unturned to improve top-line performance and expand customer base. Kroger updated its fiscal 2020 view following sturdy performance in the first half and on expectation of sustained food-at-home trend. Management envisions fiscal 2020 earnings between $3.20 and $3.30 per share, which suggests an improvement of 45-50% on a year-over-year basis. For fiscal 2020, Kroger expects total identical sales, without fuel, to exceed 13% and anticipates adjusted FIFO operating profit in the band $3.9-$4 billion.

Shares of this Zacks Rank #2 (Buy) have gained 15.7% so far in the year compared with the industry’s growth of 14.8%.

3 More Key Picks in Retail

Target TGT has a long-term earnings growth rate of 7.2% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big Lots BIG has a trailing four-quarter earnings surprise of 54.4%, on average. The stock carries a Zacks Rank #2.

Sprouts Farmers Market SFM, a Zacks Rank #2 stock, has a long-term earnings growth rate of 9.2%.

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Target Corporation (TGT) : Free Stock Analysis Report
 
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