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Kroger (KR) Outpaces Industry in the Past 6 Months: Here's Why

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The Kroger Co. KR, one of the widely recognized names in the Retail - Supermarkets industry, has exhibited an outstanding run on the bourses in the past six months. Thanks to its operational initiatives — strengthening of omni-channel solutions, expanding customer reach and focus on product innovation — the stock has outpaced the industry and the broader Retail-Wholesale sector. In the said period, shares of Kroger have surged about 20.5% against the industry’s decline of 4.2%. Meanwhile, the sector rose 3.9%.

Additionally, an uptrend in the Zacks Consensus Estimate echoes the same sentiment. The consensus estimates for the current and next financial year have increased about 6.4% and 5.1% to $3.01 and $3.10, respectively, over the past 30 days. Notably, this Zacks Rank #3 (Hold) stock’s long-term earnings growth rate of 8.5% and a VGM Score of A highlight its inherent strength.

Strengthening Position in Industry

Kroger, which operates in the thin-margin grocery industry, has been undergoing a complete makeover not only with respect to products but also in terms of the way consumers prefer shopping grocery. The company has been adding new products to its plant-based line as well as eyeing technological expansion. Its acquisition of meal kit company Home Chef and partnership with British online grocery delivery firm Ocado reinforces its position in the online ordering, automated fulfillment and home delivery space.

This Cincinnati, OH-based company has been making significant investments to enhance product freshness and quality, and expand digital capabilities. Impressively, Kroger has been introducing new items under its “Our Brands” portfolio — launched 253 new items during the quarter first quarter of fiscal 2021. Further, it has expanded its partnership with 80 Acres Farms, whereby the latter will serve 316 Kroger locations.

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Zacks Investment Research

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Kroger’s digital business remains one of its key growth drivers. Clearly, customers have been opting e-commerce solutions for their grocery and other household essentials. Considering the current scenario, 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 or “Scan, Bag, Go”. Additionally, the company has been expanding its Customer Fulfillment Center so as to ensure efficient deliveries.

We note that digital sales rallied 16% (or grew 108% on a two-year stacked basis) during the first quarter. Markedly, the company expanded to 2,233 Pickup locations and 2,488 Delivery locations. The company also opened its first two Kroger Delivery facilities, powered by Ocado, in Ohio and Florida. It expanded the capacity for Pickup by 15% with focus on adding high-demand time slots. Apart from these, the company announced Kroger Drone Delivery pilot in partnership with Drone Express, reinforcing the importance of timely delivery to customers.

Wrapping Up

It is true that increased at-home consumption acted as a tailwind for Kroger last year but as the economy gradually reopens and people return to their usual lifestyles, the company may face tough comparisons. Nonetheless, we still believe that Kroger’s focus on fresh offerings, technology and process improvements to lower costs, seamless digital ecosystem and margin-rich alternative profit business should continue contributing toward growth.

Although the company continues to expect a decline in identical sales due to tough year-on-year comparison; we note that on a two-year stacked basis, its identical sales projection suggests 10.1-11.6% growth for fiscal 2021. Management expects full-year adjusted net earnings per diluted share in the range of $2.95-$3.10, indicating a two-year CAGR of 16-19%.

3 Stocks You May Bet On

Target Corporation TGT has a trailing four-quarter earnings surprise of 62.1%, on average. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General DG has a long-term earnings growth rate of 11.3%. It currently carries a Zacks Rank #2 (Buy).

Walmart WMT has a trailing four-quarter earnings surprise of 17.8%, on average. It presently carries a Zacks Rank #2.

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