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Why Is Kroger (KR) Down 6.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Kroger (KR). Shares have lost about 6.2% 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 Q1 Earnings Surpass Estimates, Decline Y/Y

The Kroger Co. reported first-quarter fiscal 2019 results, wherein both the top and bottom line came ahead of the Zacks Consensus Estimate. However, both the metrics continued to decline year over year. Management also reiterated its fiscal 2019 forecast.

Let’s Introspect

The company, which concluded the sale of Turkey Hill business, delivered adjusted earnings of 72 cents a share that came a penny ahead of the Zacks Consensus Estimate but fell 1.4% from 73 cents reported in the prior-year quarter. This Cincinnati, OH-based company continues to envision fiscal 2019 net earnings in the band of $2.15-$2.25 per share, which indicates an improvement over adjusted earnings of $2.11 per share reported in fiscal 2018.

Total sales of $37,251 million surpassed the Zacks Consensus Estimate of $36,865 million but decreased 1.2% from the prior-year quarter. The year over year decline in total sales was due to the sale of Kroger's convenience store business unit.

Excluding fuel and the impact of the sale of convenience store business unit, top line improved 2% from the year-ago period. The company’s digital sales surged 42%, while identical sales, excluding fuel, grew 1.5%. The timing of SNAP disbursement adversely impacted identical sales results by 15 basis points. Management reaffirms identical sales growth forecast of 2-2.25% in fiscal 2019.

We note that gross margin increased 20 basis points to 22.2%, after expanding 10 basis points in the preceding quarter. FIFO gross margin, excluding fuel, shrunk 40 basis points from the year-ago period, mainly due to industry-wide lower gross margin rates in pharmacy. Adjusted FIFO operating profit fell 6.4% to $957 million. Kroger anticipates adjusted operating profit in the band of $2.9-$3 billion.

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 informed that “Our Brands” sales grew 3.3% buoyed by double-digit growth in Simple Truth. The company also introduced 219 new Our Brands items. Pickup or Delivery reached 93% of Kroger households. The company is testing new Home Chef retail meal solutions, comprising oven-ready options, Heat & Eat choices, and lunch kits. Management is also targeting “margin-rich alternative profit streams” which are likely to contribute an estimated incremental $100 million in operating profit this fiscal year versus the prior.

Other Financial Aspects

Kroger ended the quarter with cash of $365 million, total debt of $13,469 million, and shareholders’ equity of $8,532 million. Total debt decreased $832 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.54 compared with 2.43 in the year-ago period but down from 2.83 at the end of fiscal 2018.

In the trailing four quarters, the company bought back $216 million of shares and paid $440 million in dividends. 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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Kroger has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front 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 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 this revision looks promising. 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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