Kroger Shares Soar on Earnings Beat and Raised Outlook; Analysts Raise Price Targets
Kroger stock surged over 11% on Thursday after the Ohio-based food retailer reported better-than-expected earnings in the third quarter and lifted its annual sales and profit forecasts, prompting several analysts to raise their one-year price targets.
The retailer, which operates over 2,500 supermarkets and multi-department stores throughout the United States, said its identical sales without fuel increased 3.1%, two-year stack increased 14.0% and digital sales two-year stack grew 103%.
Total company sales were $31.9 billion in the third quarter, compared to $29.7 billion for the same period last year. Excluding fuel, sales increased 2.9% compared to the same period last year.
The gross margin was 21.66% of sales for the third quarter. The FIFO gross margin rate, excluding fuel, decreased 41 basis points compared to the same period last year. This decrease was primarily related to higher supply chain costs and continued price investments partially offset by sourcing benefits.
The company added that operating profit came in at $868 million and adjusted earnings per share of $0.78, beating the market expectations of $0.67 per share.
The supermarket chain is known for exceeding earnings expectations. Kroger has beaten earnings estimates in most quarters in the two years.
Kroger said it expects full-year adjusted earnings per share of $3.40 to $3.50, compared with its prior forecast of $3.25 to $3.35. The company expects annual same-store sales to dip 0.2% to 0.4%, compared to a fall of 1% to 1.5% it forecast previously.
Kroger’s shares closed 11.04% higher at $44.65 on Thursday. The stock surged over 40% so far this year.
“Driven by the momentum in our third-quarter results and sustained food at home trends, we are raising our full-year guidance. We now expect our two-year identical sales stack to be in the range of 13.7% to 13.9%. We expect our adjusted net earnings per diluted share to be in the range of $3.40 to $3.50,” said CFO Gary Millerchip.
“Kroger is executing against its key financial and operational initiatives and continues to invest in strategic priorities that will drive attractive and sustainable total shareholder returns. We believe our business is emerging stronger through the pandemic and is well-positioned to grow beyond 2021.”
“Narrow-moat Kroger posted strong third-quarter earnings that should lead us to raise our $38 per share valuation by roughly 10% (near the trading price’s reaction). We still believe the firm is uniquely suited to navigating a challenging grocery landscape long term as e-commerce continues to grow and competition intensifies, expecting Kroger to post low-single-digit revenue and adjusted operating margins on average over the next decade. Still, we suggest prospective investors seek a margin of safety before taking a position,” noted Zain Akbari, equity analyst at Morningstar.
“Identical sales excluding fuel rose 3% (14% two-year stacked growth) against a 3.1% adjusted operating margin that rose around 10 basis points despite rising supply chain and labour costs. Management raised full-year guidance, now calling for $3.40 to $3.50 in adjusted diluted EPS (previously $3.25 to $3.35), and we plan to lift our prior $3.31 estimate into the new range.”
Kroger Stock Price Forecast
Fourteen analysts who offered stock ratings for Kroger in the last three months forecast the average price in 12 months of $41.85 with a high forecast of $50.00 and a low forecast of $34.00.
The average price target represents a -6.27% change from the last price of $44.65. From those 14 analysts, two rated “Buy”, nine rated “Hold” while three rated “Sell”, according to Tipranks.
Morgan Stanley gave the base target price of $34 with a high of $60 under a bull scenario and $20 under the worst-case scenario. The firm gave an “Underweight” rating on the food retailer’s stock.
“Kroger (KR) is one of the largest conventional food retailers, with competitive advantages including leading scale, an advanced customer data science platform, and ramping digital capabilities. 2020 was a historically strong year for KR driven by COVID-19 uplifts, but KR’s share gains are already normalizing and we anticipate an industry sales slowdown in 2022 that is underappreciated in Street estimates,” noted Simeon Gutman, equity analyst at Morgan Stanley.
“Meanwhile we model EBIT margins normalizing close to pre-COVID levels in 2022 as the return of promotional activity and dilutive e-comm pull-forward pressure margins. Longer-term we struggle to model a path to sustainable EBIT growth and margin stabilization due to competitive industry intensity.”
Several other analysts have also updated their stock outlook. Jefferies raised the target price to $43 from $40. Oppenheimer lifted the target price to $46 from $44. JP Morgan upped the target price to $44 from $42. Telsey Advisory Group increased the target price to $47 from $45. Credit Suisse raised the target price to $47 from $40.
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