Kroger Better Positioned Than Most To Survive The Grocery 'Price War'

Kroger's stock has lost nearly 5 percent over the past week after its earnings report included a few warning signs including a downward-revised full-year outlook and deflationary pressures.

However, Higgins pointed out that unlike some of its grocery peers, Kroger did not report engaging in aggressive promotional activity.

"There could be some irrational behavior in certain markets, but the impact on KR may be limited due to KR's wide geographic footprint," the analyst wrote. "KR is staying the course with its Customer 1st strategy, which continues to drive tonnage growth and market share gains, and we expect non-fuel ID's to recover once deflation eases."

Related Link: Food Deflation Is "Great" For Consumers But "Terrible News" For Grocery Chains

Higgins did acknowledge that, as of right now, there "does not appear to be much visibility" into when exactly deflationary pressures will cease. The analyst added that the past two deflationary periods in 2002 and 2009 were both short-lived, and he would "not be surprised" to see the deflationary environment lasting until at least the first quarter of 2017.

'Challenging' Future For Grocers

As such, Higgins expects the next few quarters to be "challenging" not only for Kroger but the entire industry. Nevertheless, Kroger is "better positioned than most" to "manage" through a deflationary environment given its large scale, a strong market share in the local market, an attractive private brand portfolio and a compelling loyalty card program that reveals consumer insights.

Bottom line, Higgins' outlook when coupled with an "attractive" valuation for Kroger's stock at 6.8x fiscal 2017 estimated EV/EBITYDA justifies a continued Buy rating but with a price target lowered to $39 from a previous $41.

At time of writing, Kroger was down 2.06 percent on the day at $30.86.

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