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Kroger Takes Quite a Hammering: Down 38% YTD on Retail Woes

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A glimpse of The Kroger Company’s (KR - Free Report) share price movement reveals that it has plunged over 38% so far in the year compared with the industry’s gain of 7.9%. So what is behind the debacle? We have tried to ascertain major reasons that can be held responsible for the stock’s dismal show in the bourses. Definitely, management is not sitting idle and trying all means to pull the company out of the doldrums. Let’s analyze the stock.

What’s Bothering the Stock?

Margins at Stake

Stiff competition, volatility in food prices, aggressive promotional environment and waning store traffic are making things tough for Kroger. The company’s shares came under immense pressure, after the news of Whole Foods Market buyout by Amazon.com Inc. (AMZN - Free Report) spread through the market. The deal has helped positioned Whole Foods’ better against the likes of Kroger, Target Corporation (TGT - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) .

Analysts are looking at this mammoth acquisition as an amalgamation between online marketplace and physical stores that could bring a massive change in the retail industry going forward. In order to stay in the race, Kroger has to revisit strategies and prepare itself for more aggressive price war ahead at the cost of margins. Not surprisingly, Amazon has already initiated price cuts across various Whole Foods products.

Waning Bottom Line

This is evident from second-quarter fiscal 2017 results, wherein the bottom line continued to decline year over year for the fourth straight quarter. After falling 4.7% and 7% in the third and fourth quarters of fiscal 2016, respectively, bottom line plunged 18.3% and 17% in the first and second quarters of fiscal 2017, respectively.

Nevertheless, the company continues to project fiscal 2017 adjusted earnings in the band of $2.00-$2.05 per share down from $2.12 reported in the prior year. As a result, not much movement was noticed in the Zacks Consensus Estimate in the past seven days. The Zacks Consensus Estimate of $1.98 and $1.99 for fiscal 2017 and 2018 has declined by 1 and 3 cents, respectively.

Debt Burden

Apart from the aforementioned reasons, Kroger’s debt level may also elevate investors’ concern. The company ended second-quarter fiscal 2017 with a total debt of $14,048 million compared with $12,420 million in the year-ago period. As a result, interest expense rose 19% year over year in the quarter under review, following an increase of 14.2% in the first quarter of fiscal 2017 and 11.5% and 16% in the fourth and third quarters of fiscal 2016, respectively.

We also noted that the company’s debt-to-equity ratio, which represents the proportion of debt and equity it is deploying to finance its assets, is displaying an increasing trend — 1.88, 2.09, 2.10, 2.19, 2.29 in the second, third and fourth quarters of fiscal 2016, and first and second quarters of fiscal 2017, respectively. Higher debt level may adversely impact the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.

Strategic Endeavors

Nevertheless, Kroger remains well on track to boost market share by expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. We note that total sales grew 3.9% during the second quarter of fiscal 2017, following an increase of 4.9% in the preceding quarter and 5.5% in the final quarter of fiscal 2016.

The second quarter also marked the fourth straight quarter of revenue beat. Top line continues to improve fueled by Customer 1st strategy, digital endeavors and recent buyouts. Excluding fuel center sales, total sales rose 3.8%. Digital revenue surged 126% on the back of ClickList. The company has over 813 ClickList and ExpressLane locations.

Management continues to deploy capital to concentrate more on remodels, merchandising, and other viable projects. Kroger remains optimistic about the acquisitions of Vitacost.com, an online retailer of vitamins and health-oriented products; Harris Teeter, a grocery chain, and the merger of Modern HC Holdings with Axium Pharmacy Holdings Inc., a specialty pharmacy. Kroger also acquired Roundy's, the grocery store operator.

Given the pros and cons embedded stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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