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Kroger Stock Rallies on Robust Fiscal 2020 View & Buyback Plan

Zacks Equity Research

The Kroger Co. KR stock rallied 11.4% yesterday after it forecast strong profits for fiscal 2020, which was above the Zacks Consensus Estimate, based on gains from its “Restock Kroger” program and strong financial model. Additionally, its new share buyback program made investors optimistic about the company’s promise of improving shareholder returns.

Fiscal 2020 Outlook

For the fiscal year, the leading supermarket chain expects adjusted earnings per share of $2.30-$2.40, whereas the Zacks Consensus Estimate is pegged at $2.29. The company also anticipates identical store sales growth, excluding fuel, of greater than 2.25%. Additionally, it expects to generate incremental operating profit growth of $125-$150 billion from alternative profit businesses. The company anticipates free cash flow of $1.6-$1.8 billion.

Further, it expects adjusted FIFO operating profit of $3-$3.1 billion. The company expects capital investments of $3.2-$3.4 billion, excluding mergers, acquisitions and purchase of leased facilities. Moreover, it targets share repurchases between $500 million and $1 billion in fiscal 2020. The company anticipates effective tax rate of 23%.

Kroger’s robust forecast for fiscal 2020 and beyond is attributed to strong momentum in its ambitious Restock Kroger program, which aims at revamping business to fend off growing competition from the likes of Walmart WMT, Target TGT and Amazon.com AMZN. Under the Restock Kroger program, the company is focused on enhancing product assortments, ensuring speedy deliveries and reducing prices. It is also making investments in space optimization, store remodels and technology advancements. Additionally, Kroger is expanding private-label offerings to attract customers.

The company expects its financial model to drive operating profit growth in the coming years along with generating robust free cash flow. This is likely to reflect in its strong total shareholder return, visible from sustained net earnings growth and returning of cash to shareholders through share buybacks and dividends.

New Buyback Plan

The company has announced a new share repurchase program of nearly $1 billion, which replaces the existing plan that has about $546 million remaining.

Targets Beyond 2020

Following an optimistic view for fiscal 2020, Kroger provided an initial outlook for years beyond 2020. The company expects total shareholder returns of 8-11% beyond fiscal 2020, driven by 3-5% earnings growth as well as robust free cash flow.

Fiscal 2019 View

Despite the optimism on fiscal 2020 and beyond, Kroger reiterated its robust view for fiscal 2019. It continues to project adjusted earnings per share of $2.15-$2.25 for fiscal 2019, with identical store sales growth of 2-2.25%. It expects operating profit of $2.9-$3 billion. Meanwhile, it projected effective tax rate of 22.5-23%. Further, the company estimates capital investments of $3-$3.2 for fiscal 2019.

Price Performance

Shares of the Zacks Rank #3 (Hold) company has gained 16.4% in the past three months, compared with the industry’s 7.9% growth.


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