Can Kroger Keep The 2020 Magic Alive?

Kroger KR, America's largest supermarket by revenue, has seen its sales spike this year due to the pandemic. But, investors are concerned that the ‘good times' for the grocery store chain could be coming to an end, as vaccine developers are providing hope that COVID-19's days are numbered.

What shareholders fear is for the supermarket chain to be heading back to its pre-pandemic industry-lagging sales growth. Its upcoming earnings report cannot exactly alleviate that concern entirely, but it will at least reveal the position from which Kroger has entered the holiday shopping season.

Below are the main three factors that investors will be focused upon when its report is released on Thursday, December 3^rd.

1. In Business, You Are Either Growing Or Dying.

For its last reported quarter, Kroger delivered robust sales gains and surging earnings. More specifically, despite easing of measures that allowed many restaurant chains to open, its volume growth hardly slowed between fiscal Q1 and fiscal Q2. Back in September, management attributed the 15% comp sales spike in the second quarter to market share gains.

The industry is booming, but the question is whether Kroger is still increasing its piece of the pie. Its biggest competitor Walmart WMT, just announced a 6.4% domestic comp sales increase for Q3, which is a slowdown from the prior quarter's 9.3% increase. Walmart said its grocery sales in the U.S. were up in the mid-single digits so Kroger's gains are likely to land on the same territory.

But Kroger has one key competitive advantage, and that is its wide product offering that ranges from value-focused to upscale with popular in-store brands like Simple Truth.

2. Cost Management Progress Matters, A Lot.

Kroger might not have a say in the growth or slowdown of the entire industry, but it can do plenty to control its costs. During the last reported quarter, a healthy gross profit margin and falling expenses significantly contributed to its strong cash flow and expanding earnings. Investors are always thrilled to see these measurement as they allow adjusted earnings to continue rising.

3. Outlook

Kroger's last official fiscal 2020 outlook was positive, but it came with some major caveats which are bound to be cleared up with the upcoming report. Back in September, management predicted adjusted comp sales gains would exceed 13% for the full fiscal year, while adjusted earnings would rise by nearly 50%.

CEO Rodney McMullen and his team warned that this forecast reflected an unusually wide range of possibilities due to the dynamic nature of this particular crisis that has caused significant shifts in consumer spending. Back then, it was unclear how a second wave might affect customer traffic or how will consumer behavior react and adjust to the withdrawal of federal financial stimulus. Considering the current circumstances that change day to day, no one can blame companies for being reluctant to provide guidance altogether. As for analysts, on average, they are expecting reported profits to land at $0.66 per share which is up from $0.47 per share a year ago.

The Holiday Season Is The Most Wonderful Time Of The Year

Whatever is the outcome of its reported quarter on Thursday, Kroger will have three more months of updated sales trends to review to make its regular forecast for the full year. It can be argued these are the most important three months due to the holiday season, with many struggling retailers hoping for a Christmas miracle to help them stay above water. It's possible for Kroger to offer a conservative outlook as COVID-19 is raging across the U.S., although it is more likely for the company to modestly boost its sales growth and earnings guidance as it's in for another quarter of elevated demand.

Shareholders and investors will have their eyes wide open on the chain's capabilities to execute over the holiday shopping season. But whatever happens, when a new fiscal year kicks in at the end of January, Kroger will at least have a good year under its belt.

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