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Kroger (KR) Down 6.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Kroger (KR). Shares have lost about 6.7% 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 the most recent earnings report in order to get a better handle on the important drivers.

Kroger’s Q4 Earnings Miss Estimates, FY19 View Soft

The Kroger Co. reported fourth-quarter fiscal 2018 results, wherein the bottom line not only missed the Zacks Consensus Estimate but also declined year over year. Management also provided muted earnings view for fiscal 2019.

Let’s Introspect

The company delivered adjusted earnings of 48 cents a share that fell short of the Zacks Consensus Estimate of 51 cents and declined 23.8% from 63 cents reported in the prior-year quarter. Adjusting for 53rd week in in fiscal 2017, bottom line fell 11.1% from 54 cents reported in the year-ago quarter.

This Cincinnati, OH-based company now envisions fiscal 2019 net earnings in the band of $2.15-$2.25 per share. We note that the guided range came below analysts’ expectations. However, the range fared better than the adjusted earnings of $2.11 per share reported in fiscal 2018.

Total sales declined 9.5% to $28,091 million from the prior-year quarter but came marginally ahead of the Zacks Consensus Estimate of $28,012 million. Excluding fuel, the 53rd week in fiscal 2017, the convenience store business unit divestiture and the merger with Home Chef total sales jumped 1.6%. The company’s identical sales, excluding fuel, grew 1.9%. Management now expects identical sales growth, excluding fuel, to be between 2% and 2.25% in fiscal 2019.

We note that gross margin increased 10 basis points to 22%, after shrinking 80 basis points in the preceding quarter. Meanwhile, excluding fuel, the 53rd week in fiscal 2017, and the LIFO credit, gross margin fell 93 basis points during the quarter under review, after declining 91 basis points in the third quarter. Management hinted that gross margin contracted due to changes in mix as well as investments in supply chain and in price.

FIFO operating profit came in at $621 million compared with $782 million in the same period last year, excluding the 53rd week. Management now expects FIFO operating profit to range between $2.9 billion and $3 billion for fiscal 2019.

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 is also targeting “margin-rich alternative profit streams”. The company also attained more than $1 billion in cost savings through process improvements. Digital sales surged 58% during fiscal 2018 and Pickup or Delivery reached 91% of Kroger households.

Kroger has been intensely working toward enriching customers’ shopping experience via innovations and enhancement of the e-commerce capabilities. To this end, the company has launched Kroger Pay, a mobile payment app. Also, it has rolled out the Kroger REWARDS debit card — a rewarding payment service. Kroger also expanded its Home Chef Express meal kits nationwide. The company also partnered with Microsoft to enhance customers’ shopping experience through data driven technology. The company is aggressively working toward more convenient grocery delivery options. In this regard, the company has started using Nuro’s fully autonomous, driverless R1 vehicles for grocery delivery services.

Other Financial Aspects

Kroger ended the quarter with cash of $411 million, total debt of $15,229 million, and shareholders’ equity of $7,835 million. Total debt decreased $360 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.83 compared with 2.65 in the year-ago period. In the trailing four quarters, the company bought back $2 billion of shares and paid $437 million in dividends.

The company invested $3 billion in capital in 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.

Bottom Line

We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Kroger has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, 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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