RBC Out Defending Kroger: 'Enough Is Enough'

Although the competitive landscape remains challenging, food inflation and Kroger Co KR's competitive advantages would likely “re-emerge,” RBC Capital Markets’ William Kirk said in a report. He added that “struggles at smaller conventional peers” could result in a volume shift into Kroger and that the fears surrounding the company now “appear overstated.”

Kirk upgraded the rating on the company from Sector Perform to Outperform, while maintaining the price target at $37. He stated Kroger’s stock did not have “much multiple downside remaining.”

Overcapacity And Increased Competition

Industry overcapacity is not a new problem, Kirk pointed out. He further stated that as the prolonged period of deflation would cause increased solvency issues at smaller companies. Moreover, Kroger's advanced data analytics and loyalty program give the company “a relative advantage with CPG companies who are striving to improve promo spending efficiency.”

Food Inflation

U.S. agricultural exports have recently been strong and excess supply appears to be declining. The analyst expects inflation by May/June.

“With easing deflationary pressure and emerging structural advantages, we believe we are on the precipice of improving results. While there will be near-term gross margin pressure (largest in 1Q), we attribute it to the easing deflation rather than increased competition,” Kirk wrote. He added that the near-term expectations were already low.

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