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Why Is Kroger (KR) Down 3.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Kroger (KR - Free Report) . Shares have lost about 3.5% in that time frame, outperforming 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 catalysts.

Kroger’s Q4 Earnings Beat Estimates, Increase Y-o-Y

After witnessing a negative earnings surprise in the third quarter of fiscal 2019, The Kroger Co. reported a beat in the fourth quarter. The company posted adjusted earnings of 57 cents a share that came a penny ahead of the Zacks Consensus Estimate and increased 18.8% from the prior-year quarter. The company continues to envision fiscal 2020 earnings between $2.30 and $2.40 per share, which indicates an increase from adjusted earnings of $2.19 reported in fiscal 2019.

Total sales of $28.89 billion almost came in line with the Zacks Consensus Estimate, following a miss in the preceding two quarters. The metric increased 2.1% from the prior-year quarter. Excluding fuel and dispositions, top line improved 2.3% from the year-ago period. The company’s digital sales surged 22%, while identical sales, excluding fuel, grew 2%. Management forecast identical sales, excluding fuel, to be above 2.25% in fiscal 2020.

We note that gross margin contracted 30 basis points to 22.1%. FIFO gross margin, excluding fuel, expanded 6 basis points from the year-ago period on account of improvement in costs of goods and accelerating alternative profit streams, partly offset by investments in price and personalization and continued industry-wide lower gross margin rates in pharmacy. Adjusted FIFO operating profit increased 20.7% to $758 million. Kroger anticipates adjusted operating profit in the band $3-$3.1 billion for fiscal 2020.

Strategic Endeavors

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 exceed $23.1 billion. The company also introduced 39 new Our Brands Plant-Based products in 2019. Pickup or Delivery reached 97% of Kroger households (expanded to 1,989 Pickup locations and 2,385 Delivery locations). Management is also targeting “margin-rich alternative profit streams” which contributed more than $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 $393 million, total debt of $14,076 million, and shareowners’ equity of $8,573 million. Net total debt decreased by $1,141 million over the last four quarters. Kroger returned $951 million to shareholders in fiscal 2019. The company bought back shares worth $400 million during the fourth quarter as part of its authorization of $1 billion. 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?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Kroger has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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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