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Vivek Kumar
Kroger

Kroger Co, one of the world’s largest food retailers, expects their 2020 same-store sales without fuel to grow more than 13% and forecasts full-year adjusted EPS growth of about 45% to 50%; however, some equity analysts are skeptical over the long-term growth story.

U.S. supermarket chain said its total company sales were $30.5 billion in the second quarter, compared to $28.2 billion for the same period last year. Excluding fuel, sales grew 13.9%. Gross margin was 22.8% of sales for the second quarter.

During the quarter, Kroger repurchased $211 million shares under its $1 billion board authorization announced on November 5, 2019. On September 11, 2020, the Board of Directors authorized a $1 billion share repurchase program, replacing the prior authorization.

“Kroger (KR) reported upside on 2Q20 comps, a new $1 billion buyback, and delivered a generally optimistic FY20 outlook based on sustained FAH trends. However, the co. is investing in pricing/promos along w/ free pickup in an attempt to enhance overall value, which is hampering leverage,” said Christopher Mandeville, equity analyst at Jefferies.

“Incremental profitability in digital is a pos. step, although we have doubts about long-term strategy. Overall, reit. Hold as we question KR’s strategic positioning and long-term outlook vs. scaled peers,” Mandeville added.

Kroger’s shares ended 1.06% higher at $34.37 on Friday, but the stock is up about 20% so far this year.

Executive comments

“As we talk to other companies across America, we believe return to work will look very different, with many employees working part of the week from home. 2021 will be even stronger than we previously anticipated,” said chief executive officer Rodney McMullen told analysts on a call, Reuters reported.

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Kroger stock forecast

Sixteen analysts forecast the average price in 12 months at $36.53 with a high forecast of $42.00 and a low forecast of $33.00. The average price target represents a 6.28% increase from the last price of $34.37. From those 16 equity analysts, five rated “Buy”, 11 rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $35 and gave the company an “Equal-weight” rating. JP Morgan Chase & Co. boosted their price objective on Kroger to $34 from $33 and gave the company a “Neutral” rating.

Other equity analysts also recently updated their stock outlook. Telsey Advisory Group raised their price target to $43 from $41. ValuEngine upgraded Kroger from a “Strong sell” rating to a “Sell” rating in a research report on Monday, August 3rd. Wells Fargo & Co boosted their price objective to $38 from $37 and gave the stock an “Overweight” rating. BMO Capital Markets reiterated a “Hold” rating and set a $34.00 price target. At last, UBS Group increased their stock price forecast to $35 from $33 and gave the stock a “Neutral” rating.

Analyst views

“Our $31.50 fair value estimate for narrow-moat Kroger should rise by a mid-single-digit percentage after the company announced strong second-quarter earnings fueled by Americans’ continued pandemic-related turn homeward. While top-line expansion tapered from first-quarter levels ( 14.6%  identical sales growth,  excluding fuel,  versus 19.0%), Kroger now appears poised to beat our prior full-year 9% target, particularly with rising infection rates in the fall and winter likely to maintain or amplify current trends,” Zain, equity analyst at Morningstar.

“Coupled with strong scale-driven profitability (roughly 70 basis points of adjusted operating profit expansion, or nearly 85 basis points year to date, against our 30-basis-point prior estimate), we anticipate lifting our fiscal 2020 adjusted EPS estimate of $2.78 toward management’s $3.20-$3.30 range,” Akbari added.

Upside and Downside Risks

Upside: 1) COVID-19 provides meaningful ID sales/EBIT uplift and drives longer-term shift to Food at Home. 2) Continued share gains from other conventional operators/independent grocers. 3) Ocado partnership shows signs of progress – highlighted by Morgan Stanley.

Downside: 1) COVID-19 fails to drive higher profitability with incremental expenses to support demand. 2) Promotional environment intensifies, driven by WMT/discounters. 3) Online competition pressures margins.

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