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Why Is Kroger (KR) Down 5.8% Since Last Earnings Report?

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It has been about a month since the last earnings report for Kroger (KR - Free Report) . Shares have lost about 5.8% 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 drivers.

Kroger’s Q2 Earnings & Revenue Beat Estimates

After reporting a positive earnings surprise of 15.9% in the first quarter of fiscal 2018, The Kroger Co. again delivered better-than-expected second-quarter bottom-line results. Top line also came ahead of the Zacks Consensus Estimate for eighth straight quarter.

However, identical sales, without fuel, fell short of analysts’ expectation. Moreover, gross margin continues to contract. Further, in spite of reporting better-than-expected results, management maintained its full year adjusted earnings per share view. These were not well perceived by investors.

Let’s Introspect

The company delivered adjusted earnings of 41 cents a share that beat the Zacks Consensus Estimate of 38 cents and increased 5.1% from the prior-year quarter. This Cincinnati, OH-based company continues to envision adjusted earnings in the range of $2.00-$2.15 per share.

However, the company revised its GAAP net earnings view to $3.88-$4.03 per share from its previous range of $3.64-$3.79 owing to the unrealized gain in Ocado shares, recorded in the quarter under review.

Total sales grew 1% to $27,869 million from the prior-year quarter and came marginally ahead of the Zacks Consensus Estimate of $27,795 million. Excluding fuel, the convenience store business unit divestiture and the merger with Home Chef total sales jumped 1.8%. Digital sales surged more than 50% during the quarter under review.  

The company’s identical sales, excluding fuel center sales, grew 1.6%. Kroger projects fiscal 2018 identical sales growth, excluding fuel, to be in the range of 2%-2.5%.

We note that gross margin contracted 40 basis points to 21.3%, after shrinking 30 basis points in the preceding quarter. Meanwhile, excluding fuel and the LIFO charge, gross margin fell 36 basis points during the quarter under review, after declining 13 basis points in the first quarter. Management hinted that gross margin rate reflected price investments, higher transportation costs and growth of the specialty pharmacy business.

Kroger Ups the Grocery Retail Game

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 the 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.

In order to bolster its omni-channel capabilities, Kroger acquired meal kit provider, Home Chef. The company also partnered with British online grocery delivery company, Ocado that reinforces its position in the online ordering, automated fulfillment and home delivery space. The company’s latest deal with Nuro — the maker of driverless road vehicle — to deliver groceries at customers’ door steps using autonomous vehicles is just another game plan to take on rivals.

Kroger launched “Our Brands” internationally, making Simple Truth products such as nuts, dietary supplements etc. available in China by joining forces with Alibaba's Tmall platform. Taking forward its partnership with Instacart, the company plans to enhance its customer delivery coverage area to 75 more markets by the end of the October. The company also launched a grocery delivery service “Kroger Ship”.

Moreover, after the sale of its convenience store business earlier this year, the company has now started searching strategic alternatives for its Turkey Hill Dairy business, including a potential sale. Clearly, the company has been narrowing its non-grocery footprint and making investments to expand its grocery offerings as well as e-commerce presence.

Other Financial Aspects

Kroger ended the quarter with cash of $316 million, total debt of $14,532 million, and shareholders’ equity of $7,338 million. Total debt increased $484 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.59 compared with 2.37 in the year-ago period. In the trailing four quarters, the company bought back $2.6 billion of shares and paid $435 million in dividends. The company had approximately $546 million remaining under its share buyback program.

Management continues to project capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be approximately $3 billion for fiscal 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.2% due to these changes.

VGM Scores

At this time, Kroger has an average Growth Score of C, a grade with the same score on the momentum front. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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