Value Expert Likes Makeover at Kroger

10/03/2019 5:00 am EST


Jason Clark

Contributing Editor, The Prudent Speculator

Despite turning in solid quarterly results, shares of Kroger Co. (KR) investors seemed spooked that management of the grocery store operator wouldn’t reconfirm its three-year forecast to generate $400 million in incremental profit, notes Jason Clark, value investing expert and editor of The Prudent Speculator.

Despite a sharp price dip, the stock then rebounded higher, as KR announced that same-store sales rose 2.2% in fiscal Q2 2020, exceeding expectations and the same period last fiscal year.

dditionally, the company said that adjusted EPS came in at $0.44, versus consensus analyst estimates of $0.42.

Revenue for the period of $28.2 billion came in below forecasts of $28.3 billion. Digital sales grew 31% during the period, while margins were hurt by lagging performance of the company’s in-store pharmacies.

CEO Rodney McMullen said, “We continue to reduce costs and are on track to deliver $100 million in incremental operating profit through alternative profit stream growth. We delivered strong free cash flow and are now within our targeted net total debt to adjusted EBITDA range. Kroger is laser-focused on executing against our 2019 plans and realizing our vision of serving America through food inspiration and uplift.”

While management wasn’t willing to reaffirm its three-year forecast, the company did maintain full-year guidance of $2.15 to $2.25, with same-store sales growth in the range of 2% to 2.25%.

Management wants investors to be patient, as we are, while the company continues to be transformed in the midst of heightened competition. While the transformation will take time, it is continuing to produce benefits.

Additionally, Kroger has been developing new businesses, such as selling consumer data and targeted advertising. The company said those efforts would yield $100 million in incremental operating profit in its current fiscal year compared with the prior one.

There is no doubt that competitive threats remain from the likes of Amazon, Walmart (WMT), Target (TGT), Aldi and numerous others, but Kroger has been battling competition for years.

We remain constructive on the company’s makeover and focus on investing in online abilities as well as improving the customer experience in physical stores. The shares trade at a reasonable 11.8 times next 12-month adjusted EPS projections, while the stock yields 2.4%. Our Target Price on KR is presently $34.

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