Expect An In-Line Q3 From Kroger With A Promise For Strength In Q4

Wells Fargo expects an in-line third quarter from Kroger Co KR amid industry wide challenges of deflation and margin pressures. The brokerage maintained its Outperform rating on the stock as it likes the setup of the fourth quarter given easy comparisons.

Analyst Zachary Fadem expects EPS of $0.42, a penny above Street, with identical supermarket (ID) sales in line with consensus.

Among upcoming positives, Fadem sees modest margin potential from productivity initiatives, improvement in industry and company-specific headwinds in FY 2017 and expectation of potential inflation.

Looking ahead to fourth quarter, the analyst believes the consensus ID sales estimate of +1.3 percent appears achievable absent further deterioration in the operating environment.

“While competition remains acute, our cheeks suggest the more aggressive promo activity seen in Q3 is subsiding, and KR laps a year-ago quarter negatively impacted by weather (which could present a tailwind in FY16),” Fadem wrote in a note.

Fadem says FY 2017 looks more promising for Kroger as well as grocery industry in general, driven by a potential return of fuel/food inflation. Further, the company should benefit from lower U.S. corporate taxes, moderating employee costs and restructuring of trade deals that could drive inflation of goods imported from Mexico and overseas.

“On a macro level, uncertainty remains, but should the U.S. enter a period of rising interest rates. improving GDP and consumer spending, we see KR well-positioned heading into FY17,” Fadem added.

At last check, shares of Kroger fell 1.22 percent to $33.25, with Fadem having a valuation range between $37 and $38.