It has been about a month since the last earnings report for Kroger (KR - Free Report) . Shares have added about 7.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Kroger due for a pullback? 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 catalysts.
Kroger’s Q3 Earnings Miss Estimates, Decline Y-o-Y
After registering two straight quarters of positive earnings surprises, The Kroger Co. reported a miss in the third quarter of fiscal 2019. The company posted adjusted earnings of 47 cents a share that fell short of the Zacks Consensus Estimate by a penny and declined 2.1% from the prior-year quarter.
The company envisions fiscal 2019 adjusted 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. For fiscal 2020, management estimates earnings between $2.30 and $2.40 per share.
Total sales of $27,974 million came below the Zacks Consensus Estimate of $28,067 million. This was the second straight quarter when sales missed the consensus mark. However, the metric improved marginally by 0.5% from the prior-year quarter. Excluding fuel and dispositions, top line improved 2.7% from the year-ago period. The company’s digital sales surged 21%, while identical sales, excluding fuel, grew 2.5%.
Kroger expects underlying identical sales growth in the final quarter to be equivalent to third quarter. Management forecast identical sales growth of 2-2.25% for fiscal 2019. It envisions identical sales, excluding fuel, to be above 2.25% in fiscal 2020.
We note that gross margin increased 30 basis points to 22.1%. FIFO gross margin, excluding fuel, shrunk 24 basis points from the year-ago period, mainly due to industry-wide lower gross margin rates in pharmacy. Adjusted FIFO operating profit fell 1.7% to $653 million. Kroger anticipates adjusted operating profit in the band of $2.9-$3 billion and $3-$3.1 billion for fiscal 2019 and 2020, respectively.
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’s “Restock Kroger” program involving investments in omnichannel platform, identifying margin-rich alternative profit streams, merchandise optimization, and lowering of expenses has been gaining traction. The company is expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative.
Management informed that “Our Brands” sales grew 3.4%. The company also introduced 231 new Our Brands items. Pickup or Delivery reached 96% of Kroger households (expanded to 1,915 Pickup locations and 2,326 Delivery locations). 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. Alternative profit streams are anticipated to contribute an incremental $125-$150 million in operating profit in fiscal 2020.
Other Financial Aspects
Kroger ended the quarter with cash of $417 million, total debt of $13,644 million, and shareowners’ equity of $8,728 million. Total debt decreased $1,374 million from the prior-year period. The company lowered its debt burden by $1.5 billion over the prior four quarters. Management anticipates capital expenditures of $3-$3.2 billion in fiscal 2019 and between $3.2-$3.4 billion in fiscal 2020. The company forecast free cash flow generation of $1.6-$1.8 billion in fiscal 2020. The company expects to make share repurchases of $500-$1,000 million in fiscal 2020.
How Have Estimates Been Moving Since Then?
Estimates review followed an upward path over the past two months.
At this time, Kroger has a great 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.
Kroger has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.