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Kroger (KR) Down 5.2% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Kroger (KR). Shares have lost about 5.2% 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 catalysts.

Kroger's Q2 Earnings Top Estimates, Digital Sales Soar

Kroger reported second-quarter fiscal 2019 results. The company delivered adjusted earnings of 44 cents a share that came ahead of the Zacks Consensus Estimate of 41 cents and increased 7.3% from 41 cents reported in the prior-year quarter.

Kroger continues to envision fiscal 2019 net earnings in the band of $2.15-$2.25 per share, which indicates an improvement over adjusted earnings of $2.11 per share reported in fiscal 2018.

Total sales of $28,168 million came below the Zacks Consensus Estimate of $28,398 million but increased marginally by 0.5% from the prior-year quarter. Excluding fuel, dispositions and merger transactions, top line improved 2.5% from the year-ago period. The company’s digital sales surged 31%, while identical sales, excluding fuel, grew 2.2%. Management reaffirms identical sales growth forecast of 2-2.25% in fiscal 2019.

We note that gross margin increased 30 basis points to 21.9%, after expanding 20 basis points in the preceding quarter. FIFO gross margin, excluding fuel, shrunk 29 basis points from the year-ago period, mainly due to industry-wide lower gross margin rates in pharmacy. Adjusted FIFO operating profit rose 10.6% to $626 million. Kroger anticipates adjusted operating profit in the band of $2.9-$3 billion.

Strategic Endeavors

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. Management informed that “Our Brands” sales grew 3.1%. The company also introduced 203 new Our Brands items. Pickup or Delivery reached 95% of Kroger households (expanded to 1,780 Pickup locations and 2,225 Delivery locations). Management is also targeting “margin-rich alternative profit streams” which are likely to contribute an estimated incremental $100 million in operating profit this fiscal year versus the prior.

Other Financial Aspects

Kroger ended the quarter with cash of $354 million, total debt of $13,483 million, and shareholders’ equity of $8,653 million. Total debt decreased $1,049 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.46 compared with 2.59 in the year-ago period but down from 2.83 at the end of fiscal 2018. Management project capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be in the range of $3-$3.2 billion in fiscal 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, Kroger has a nice Growth Score of B, however its Momentum Score is doing a bit 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 quintile 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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