Kroger shares on track for worst day in a year after earnings fall short

Kroger shares on track for worst day in a year after earnings fall short

‘This print was far from perfect,’ say Guggenheim analysts although they concede selloff is likely overdone

Kroger Co. shares fell sharply Thursday, after the grocery store chain posted weaker-than-expected earnings for its fiscal fourth quarter as it invests in new online initiatives in an increasingly competitive market.

The stock KR, -4.45% was last down about 10%, putting it on track for its worst one-day percentage decline in a year.

“This print was far from perfect,” Guggenheim analysts wrote in a note. Gross margins, excluding fuel are still under pressure, 2019 same-store sales guidance is below forecasts even as the three-year transformation plan Restock Kroger matures, they wrote.

“That said, the selloff looks overdone, in our view, implying a ~6x multiple on our 2019 EBITDA estimate at $25,” said the note. The recent talk that Inc. AMZN, -0.32% is looking to launch a supermarket chain has likely added to the downdraft, said the analysts.

On the company’s earnings call, Chief Executive W. Rodney McMullen acknowledged the stock move, saying “the team here at Kroger realizes that we have our work cut out for us, as the market points out this morning.

“We realize business transformations are hard but I want to emphasize we are on track to deliver on our Restock Kroger commitments,” he said.

Kroger reported net income of $259 million, or 32 cents a share, in the quarter to Feb. 2, down from $854 million, or 96 cents a share, in the year-earlier period. Adjusted net earnings came to 48 cents a share, below the 52 cents FactSet consensus.

Sales fell 9.5% to $28.1 billion, also below the FactSet consensus of $28.4 billion. Gross margins excluding fuel fell by 93 basis points, mostly due to investments in the supply chain and to keep prices low. Costs rose as the company paid more in bonuses and staffed digital initiatives.

The company said it’s expecting fiscal 2019 EPS of $2.15 to $2.25, which compares with a FactSet consensus of $2.25.

Kroger has been beefing up its online presence as the overall grocery sector braces for an increase in e-commerce following Amazon’s entry to the business through its acquisition of Whole Foods. The company has also been seeking to diversify revenue streams by expanding into areas including financial services and by tracking and selling customer data. The company said it’s on track to meet a goal of generating $400 million in operating profit by next year, although analysts on its earnings call sounded skeptical.

“While we are disappointed in the margin erosion for the quarter, the digital growth of 58% and ex-fuel same-store sales growth of 1.9% for the quarter are encouraging considering the intense competition for market share throughout the industry,” said Moody’s analyst and vice president Mickey Chadha.

“Also impressive is Kroger’s private label penetration with unit sales of Kroger’s own brands now over 30%. These brands not only have a much higher margin but also build loyalty with customers as they cannot find them elsewhere.”

Kroger shares have fallen 1.5% in the last 12 months, while the SPDR S&P Retail ETF XRT, -0.81%  has fallen 1.8%. The S&P 500 index SPX, -0.21%  has gained 1.1% and the Dow Jones Industrial Average DJIA, -0.09%  has gained 2.9%.

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