Bernstein Says Kroger Offers Reasonable Returns In Competitive Sector: 'We All Have To Eat Somehow'

The grocery store space remains "fiercely competitive," and investors willing to accept a "reasonable" rate of return may want to consider the industry giant Kroger Co KR, according to Bernstein.

The Analyst

Bernstein's Brandon Fletcher initiated coverage of Kroger's stock with a Market-Perform rating and $27 price target.

The Thesis

Kroger's streak of gaining market share in the food retail industry now stands at 12 years, and the company is well-positioned as the second-largest U.S. grocer after Walmart Inc WMT, Fletcher said in a Thursday initiation note.

Kroger boasts multiple store formats in the higher end space and offers price and convenience to the lower-end of the spectrum, the analyst said. 

Many investors are conceredwith the growing popularity of online grocery shopping, meal kit delivery options and threats from hard discounters like Aldi, but these concerns could be overblown, Fletcher said. Online grocery shopping with home delivery options is "largely logistically bankrupt" and meal kit services are expected to displace only a "small" fragment on the food market, the analyst said. Hard discounters are likely to threaten only a limited assortment of products, as "Americans shop a broader range than Europeans," he said. 

Kroger should deliver "relatively stable" earnings over the long term, as any pricing pressure could be offset with operating efficiencies, the analyst said. The stock is trading near its historical average, which creates a "somewhat balanced" risk-reward profile.

"Of course, fear of the entire sector dying makes shopping the grocers risky, but we all have to eat somehow," Fletcher said. 

Price Action

Kroger shares were jumping 3.31 percent to $23.74 at the time of publication midday Friday. 

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