Kroger Shares Slump as Online Sales Growth Slows; Target Price $36

Kroger, one of the world’s largest food retailers, reported better-than-expected profit in the third quarter but its COVID-19-driven online sales growth slowed from the preceding quarter due to easing lockdown restrictions, sending its shares down over 4% on Thursday.

The retailer which operates over 2,500 supermarkets in the U.S. reported digital sales growth of 108% in the third quarter ended November 7, lower than the 127% surge it registered in the preceding quarter.

Kroger posted total sales of $29.7 billion in the third quarter, compared to $28.0 billion for the same period last year. Excluding fuel, it climbed just over 6% to $29.72 billion, lower than the Wall Street estimate of $29.97 billion. The U.S. supermarket chain reported an EPS of $0.80 and adjusted EPS of $0.71, up 51% compared to the prior year. That better than market consensus of $0.61.

The U.S. supermarket chain forecasts adjusted per-share profit between $3.30 to $3.35 in 2020, a little better compared with its prior range of $3.20 to $3.30. Kroger forecasts same-store sales, to increase nearly 14%, up from previous expectations of a more than 13% growth.

“Our $33 per share valuation of narrow-moat Kroger is unlikely to change substantially after the firm announced solid third-quarter results (10.9% identical sales growth, excluding fuel; 2.7% operating margin) that continue to be driven by Americans’ turn homeward during the pandemic,” said Zain Akbari, equity analyst at Morningstar.

“With vaccines on the horizon, we continue to expect normalization as case counts fall in fiscal 2021, leading to2%-3% top-line growth and operating margins long-term.”

Kroger’s shares closed 4.36% lower at $30.88 on Thursday. However, the stock is up over 6% so far this year.

Executive Comments

“As a result of our continued strong performance, market share growth and the expectation of sustained trends in food at home consumption for the remainder of our fiscal year, we are raising our full-year 2020 guidance. For the full year 2020, we expect total identical sales without fuel to be around 14% and adjusted EPS growth of 50% to 53%,” said CFO Gary Millerchip

“Looking toward 2021, we believe that our performance will be stronger than we would have expected prior to the pandemic when viewed as a two-year stacked result for identical sales without fuel growth and as a compounded growth rate over 2020 and 2021 for adjusted earnings per share growth.”

Kroger Stock Price Forecast

Thirteen equity analysts forecast the average price in 12 months at $36.27 with a high forecast of $40.00 and a low forecast of $33.00. The average price target represents a 17.45% increase from the last price of $30.88. From those 13 analysts, one rated “Buy”, 12 rated “Hold”, none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $35 with a high of $55 under a bull-case scenario and $17 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the multi-department stores’ stock. JP Morgan lowered the target price to $34 from $38 and Jefferies assumes coverage with hold rating and target price of $33.

Several other analysts have also upgraded their stock outlook. Kroger had its price objective increased by investment analysts at Scotiabank to $40 from $38. The brokerage presently has a “sector outperform” rating on the stock. Wells Fargo increased their price objective to $38 from $37 and gave the company an “overweight” rating in May. Bank of America lowered shares from a “buy” rating to a “neutral” rating and set a $40.00 price objective.

Analyst Comments

“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. COVID-19 disruption is driving a meaningful acceleration in ID sales and profitability in 2020 and could result in a secular share shift to Food at Home,” said Simeon Gutman, equity analyst at Morgan Stanley.

“We expect the Food Retail industry to experience margin pressure from discount and e-comm operators over the next several years. For KR, we struggle to model a path to sustainable EBIT growth and margin stabilization. We forecast long-term ID sales of 2.5%, roughly in-line with the industry, as we expect in-store and online initiatives to keep pace,” Gutman added.

Upside and Downside Risks

Risks to 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.

Risks to 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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