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Looking at Kroger Ahead of March 2 Earnings Call

- By Sangara Narayanan

2016 didn't prove to be a great year for Kroger (KR), at least for its stock, as it lost nearly 13% of its value in the last twelve months. In the first three quarter of the current fiscal, Kroger's revenue grew grew to $87.72 billion from $83.66 billion during the year ago period, growth of 4.8%. But same store sales including fuel declined by 0.1%, and excluding fuel increased by 1.5%.


Kroger's identical store sales growth is possibly one of the best the industry has witnessed. Kroger has now grown its identical store sales for 53 consecutive quarters, but it barely kept its neck above the water, posting 0.1% identical store sales during the third quarter of the current fiscal. As you can see from the table above, in 2015, identical store sales without fuel expanded by 5.5% during the first three quarters, but that rate came down to 1.5% this year.

Kroger blamed the deflationary environment for the slowdown during its third quarter earnings call.

"As expected, deflation persisted during the third quarter. And as we've said before, transition periods create a difficult operating environment.

Deflation has not only persisted, but has increased with overall deflation, excluding pharmacy, growing from 1.3% in the second quarter to 1.5% in the third quarter.

For the fourth quarter of 2016, Kroger expects slightly positive identical supermarket sales growth, excluding fuel. The persistent and increasing deflation has caused us to adjust our view of identical store sales for the fourth quarter." -- Q3 earnings call

Inflation returned in December 2016, which will allow some breathing space for large retailers such as Kroger. The company is expecting slightly positive identical supermarket sales growth during the fourth quarter. One of the primary reasons for the stock's negative performance is the downward trend witnessed in the identical store sales and the persistent deflationary environment.

But both those items have a good possibility of turning around during the fourth quarter. If identical store sales pick up, then Kroger's stock will rise along with it. Wall Street is expecting Kroger to post 0.52 cents earnings per share

And revenue of $27.3 billion when the company reports its fourth quarter results on March 2. But more than the earnings beat, all eyes will be on identical same store sales.

Walmart, Costco and Amazon have done well in the last few months, and Kroger will have to get its number up at the earliest for it to keep pushing back at the competition. The state of the retail market is such that any weakness will be hugely exploited by the competition.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

This article first appeared on GuruFocus.