Kroger Shares Slump Over 8% After Gross Margin Disappoints in Q2

Kroger shares slumped over 8% on Friday after the food retailer said its gross margin – business’s net sales minus the cost of goods sold – fell to 21.4% year-on-year during the second quarter from 22.8% a year ago despite beating earnings estimates.

The company said this was primarily due to continued price investments, and higher shrink and supply chain costs, partially offset by sourcing benefits and growth in the alternative profit business.

However, the U.S. supermarket chain reported better-than-expected earnings and revenue in the second quarter and lifted its full-year guidance. The retailer, which operates over 2,500 supermarkets in the U.S., reported adjusted earnings per share of $0.80, beating the market expectations of $0.64 per share.

The supermarket chain is known for exceeding earnings expectations. Kroger has beaten earnings estimates in seven of the last eight quarters.

Kroger posted revenues of $31.68 billion for the quarter ended July 2021, beating the Wall Street consensus estimates of 30.4 billion. Compared to an earlier forecast of 2.5%-4% decline, the company now expects a smaller decline of 1%-1.5% annually.

Kroger shares slumped over 8% to $42.08 on Friday. The stock has surged over 30% so far this year.

Executive Comments

“Kroger’s strong execution resulted in identical sales above our internal expectations for the second quarter, and we continued to remove costs from the business. Driven by the momentum in our results and sustained food at home trends, we are raising our full-year guidance,” said CFO Gary Millerchip.

“We now expect our two-year identical sales stack to be in the range of 12.6% to 13.1%. We expect our adjusted net earnings per diluted share to be in the range of $3.25 to $3.35.”

Analyst Comments

“Another beat & raise as expected with solid IDs, OG&A leverage, and EBIT/EPS. One (big) caveat: gross margin missed and should stoke fears about margin pressure from inflation. Risk/reward skews negative in our view with share price & valuation elevated,” noted Simeon Gutman, Equity Analyst at Morgan Stanley.

“Our view is industry sales will eventually unwind and normalize; back to school/office post-Labor Day could be a catalyst for this to occur in 2H. But the Delta variant may keep demand elevated and inflation should provide a top-line tailwind. Importantly, we think the stock was already discounting at least $3.50 in ’21 EPS and as much as $3.75-$4.00. KR should still beat its updated guidance range, but we don’t see much upside beyond $3.50-$3.75 given gross margin choppiness and IDs that are unlikely to reaccelerate above 1H levels.”

Kroger Stock Price Forecast

Fifteen analysts who offered stock ratings for Kroger in the last three months forecast the average price in 12 months of $38.71 with a high forecast of $46.00 and a low forecast of $31.00.

The average price target represents a -8.38% change from the last price of $42.25. From those 15 analysts, two rated “Buy”, ten rated “Hold” while three rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $31 with a high of $50 under a bull scenario and $16 under the worst-case scenario. The firm gave an “Underweight” rating on the food retailer’s stock.

Several other analysts have also updated their stock outlook. JP Morgan raised the target price to $40 from $36. Deutsche Bank lifted the price target to $42 from $41. Guggenheim upped the target price to $41 from $37.

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