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Why Is Kroger (KR) Down 0.8% Since Last Earnings Report?

Zacks Equity Research
·4 mins read

A month has gone by since the last earnings report for Kroger (KR). Shares have lost about 0.8% 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 catalysts.

Kroger’s Q2 Earnings Beat Estimates, Digital Sales Surge

The Kroger Co. came up with second-quarter fiscal 2020 results, wherein both the top and the bottom lines not only beat the Zacks Consensus Estimate but also improved significantly from the prior-year period. Notably, this was the third straight quarter of positive earnings surprise. Impressively, the company prioritized its actions to resonate well with the prevailing crisis and burgeoning demand for essential commodities. Notably, the company’s digital business remains a key growth driver.

The company has been making prudent investments to bolster omni-channel operations, improve supply chain and increase manpower to ensure swift customer service amid such challenging times.

Let’s Introspect

Kroger posted adjusted earnings of 73 cents a share that surpassed the Zacks Consensus Estimate of 51 cents and increased sharply from 44 cents reported in the prior-year quarter.

Total sales of $30,489 million came ahead of the Zacks Consensus Estimate of $30,058.4 million. The metric increased 8.2% year over year. Excluding fuel, top line improved 13.9% from the year-ago period. The company’s digital sales surged 127%, while identical sales, without fuel, grew 14.6% compared with 92% and 19%, respectively, reported in the preceding quarter. Digital sales contributed 4.4% to identical sales without fuel.

We note that gross margin increased 90 basis points to 22.8%. FIFO gross margin, excluding fuel, expanded 5 basis points from the year-ago period driven by sourcing efficiencies, sales leverage and growth in alternative profit streams. Adjusted FIFO operating profit came in at $894 million, up from $626 million reported in the year-ago period.

Other Financial Aspects

Kroger ended the quarter with cash of $372 million, total debt of $13,482 million, and shareowners’ equity of $9,793 million. Net total debt decreased by $2,174 million over the last four quarters.

During the quarter under review, the company bought back shares worth $211 million under its $1 billion authorization announced on Nov 5, 2019. Notably, on Sep 11, the company’s board of directors authorized a $1 billion share repurchase program, overriding the prior authorization. The company expects to make share repurchases of $600-$1,000 million in fiscal 2020.

Management projects capital expenditures in the band of $3-$3.4 billion and expects to generate adjusted free cash flow between $2.5 billion and $2.7 billion in fiscal 2020.

Guidance

Notably, Kroger updated its fiscal 2020 view following sturdy performance in the first half and on expectation of sustained food-at-home trend. Management envisions fiscal 2020 earnings between $3.20 and $3.30 per share, which reflects an increase of 45-50% on a year-over-year basis. For fiscal 2020, Kroger expects total identical sales, without fuel, to exceed 13% and anticipates adjusted FIFO operating profit in the band $3.9-$4 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 17.49% due to these changes.

VGM Scores

Currently, Kroger has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Kroger has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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