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Kroger's Q1 Draws Tepid Reaction From Analysts, Investors Pull Back

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Kroger's Q1 Draws Tepid Reaction From Analysts, Investors Pull Back

Kroger Co (NYSE: KR) shares slumped Friday after the grocery chain reported lackluster identical store sales that were below company expectations.

Sell-side analysts were mostly forgiving, saying that expectations are modest — and the chain’s online efforts could be promising.

Kroger said first-quarter core identical store sales were up 1.5% not accounting for fuel, nearly in-line with expectations on the Street but below the company’s guidance.

Overall revenue did beat Street estimates, but first-quarter gross margins dropped 40 basis points year-over-year to 22.2%, mostly because of lower margins in pharmacy. Earnings per share were in-line with Street estimates.

The Analysts

Bank of America Merrill Lynch analyst Robert Ohmes reiterated a Buy rating with a $30 target price.

UBS analyst Michael Lasser remained Neutral on Kroger and lowered the price target from $27 to $25.

Credit Suisse analyst Judah Frommer maintained an Outperform rating on the stock and lowered the target price from $30 to $27.

BMO Capital Markets analyst Kelly Bania maintained a Market Perform rating with a $24 price target.

The Takeaways 

Kroger’s quarterly print will do little to change investors’ minds, Credit Suisse’s Frommer said in a Thursday note.

“Uninspiring results within core supermarket operations continue to be balanced by low expectations,” the analyst said. Credit Suisse lowered its 2019 and 2020 EPS estimates for the grocer. 

But expectations may be a bit too low given Kroger’s digital outlook, said BofA's Ohmes, who added that online is tracking to reach $9 billion in annual sales, up from $5 billion today.

Ohmes said Kroger’s recently-signed deal with Ocado to build robot-powered warehouses also could be a benefit over the next five years.

UBS analyst Lasser also hit on Kroger’s aggressive work to boost online capability.

It is adding locations for grocery pickup and delivery and growing sales through new online platforms — and the effort could be aided by the Ocado partnership, he said. 

Yet "it’s still not clear how this will influence KR’s profitability. We think it’s likely to remain a drag for at least the near-term.”

Bania said in a note to investors that BMO remains cautious on Kroger for three reasons: the outlook for food inflation isn’t very strong, Kroger’s advertising plan is overly optimistic and BMO sees long-term risks with Ocado.

Price Action

Kroger shares were down more than 3% at $22.44 at the time of publication Friday. 

Related Links: 

Kroger Analyst Roundup: Credit Suisse Says To Buy Grocer's Stock Ahead Of 'Hockey Stick' Recovery

Wells Fargo Comes Away Disappointed From Kroger's Management Meeting

Public domain photo via Wikimedia

Latest Ratings for KR

DateFirmActionFromTo
Jan 2021Morgan StanleyDowngradesEqual-WeightUnderweight
Jan 2021BarclaysDowngradesEqual-WeightUnderweight
Dec 2020Morgan StanleyMaintainsEqual-Weight

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