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Kroger (KR) to Report Q3 Earnings as Amazon Guns for Supermarket Space

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Kroger (KR - Free Report) will report its third quarter financial performance before the opening bell on Thursday, December 5. The supermarket giant’s shares have struggled to gain traction in 2019, having moved roughly sideways.

Investors hope Kroger will post strong quarterly results that will send the stock into the green for the year. Meanwhile, Amazon (AMZN - Free Report) has ramped up its efforts to establish itself in the supermarket space, which has many worried.

Kroger Adjusts to the Modern Market

Kroger is poised to compete against Amazon in the grab-and-go space. Amazon Go stores saw the success of grab-and-go items firsthand as the convenient items helped drive sales and traffic in the stores. Amazon Go stores are physical stores that allow users to buy their desired products in person and pay with their Amazon account, which eliminates registers and waiting in a check-out line.

Conventional convenience stores have also noted an uptick in food sales as companies like Casey’s General Stores (CASY - Free Report) have noted the value its prepared food brings to its bottom-line. As the grab-and-go market continues to grow, it could be an area Kroger might need to address.

Kroger must also focus on improving its online operations as more grocery shopping moves to the digital marketplace. The percentage of consumers regularly shopping for groceries online nearly doubled this year, according to a survey from TABS analytics. Walmart (WMT - Free Report) and Target (TGT - Free Report) have both been key contributors to the online groceries’ growth as their same day fulfillment services have been a hit with consumers.

In response to the emerging market, Kroger has aggressively expanded its online grocery operations and it now reaches 95% of its footprint with either pickup or delivery. The supermarket giant also elected to waive its $4.95 fee in some of its stores in hopes of attracting a larger audience.

Will Kroger Fold Under Pressure?

While online grocery shopping is growing substantially, only about 6% of all grocery purchases are made online. Kroger also boasts an established physical store footprint with nearly 2,800 grocery stores, which gives it a substantial head start over Amazon. Kroger can also optimize its physical stores to prepare grab-and-go items that can drive more traffic in its stores.

The company has also launched a test program of a new shelf display system. The enhanced display for grocery environment (or EDGE) allows shoppers to learn more about a certain food's nutritional value, which could be a hit with more health-conscious shoppers. Kroger has also started to build its first automated warehouse that will fill online grocery orders.

Kroger’s struggles to gain any steam this year has kept its valuation at a discount as it trades around 12X its forward earnings compared to the industry average of over 13X forward earnings. In addition to its valuation, Kroger pays dividend with a solid 2.3% yield that can help shareholders during stagnant times like these.

In Q2, Kroger’s total sales rose to $28.2 billion from $28 billion in the year ago quarter and earnings rallied 7.32% to $0.44 per share. Identical Sales without fuel grew 2.2% and digital sales grew 31%.

Our Q3 estimates call for earnings to come in right on par with last year’s figure of $0.48 per share and for sales to pop 1.43% to $28.07 billion. Supermarket sales without fuel are projected to grow 6.85% to $24.9 billion and identical supermarket sales (excluding fuel) is predicted to be 2.25%.

Looking ahead to the full fiscal year, our estimates forecast a bottom-line rally of 4.3% to $2.20 per share and a top-line jump of 1% to $122.4 billion.

Bottom Line

The supermarket space has become even more competitive with Amazon’s continued efforts to establish itself in the industry. The online innovation Amazon brings will force grocer’s like Kroger to adjust their operations.

However, the online grocery market is still in its infancy, which gives Kroger more time to adopt a digital strategy. In the meantime, Kroger has piloted some tech innovations in its stores that might improve the consumer experience.

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