- Buying Kroger off the lows was a bet on management and a turnaround in execution. Thus far, investors have been rewarded for not capitulating late in 2017.
- Not unsurprisingly, Kroger's share price tracks same-store sales comps data closely. The company is looking to continue momentum from a strong Q3.
- Kroger should benefit from lapping very easy comps over the next six to nine months. This likely helps the company move positively on earnings release on ho-hum data.
Near the close of Q3 2017, I penned research on embattled grocer Kroger (NYSE:KR). Shares had been nearly cut in half on extremely weak results; value hunters were out in full force. My opinion struck a cautious tone, noting how sensitive Kroger common equity was going to be towards margins and same-store sales comps. As I said then, I'm not in the business of trying to predict the nuance of incremental margin improvement at companies as large as this one: it's a struggle with many moving pieces. Buyers who took that risk late in 2017 have done well, and I believe long investors have latched onto a lot of positives that they feel are on the horizon:
- Increased sales of private label offerings
- Continuing efforts into online/digital offerings
- Taking further market share from independent producers
- The sale of the convenience store assets to EG Group for $2,150mm
Indirectly, all of these initiatives are out there to do one of two things: improve same-store sales or improve margins. As investors can see below, Kroger's share price is tied inextricably to same-store sales performance; it's been a great leading indicator of where the share price is going. It's also easy for investors, particularly recent ones, to forget just how aggressive Kroger's same-store sales comps used to be. I think that provides great context for when investors start considering whether the company deserves to be trading north of $40.00/share today:
Cutting through all the noise in movement in the share price, comps, and margins is all it comes down to. What looks to be a clear bottom as found late in 2016, and I think bullish investors will have an easy time next year. 2017 had some rough results, particularly in the first half of the year due to deflation and poor margins, and that means Kroger will be facing some easy comparisons over the next six months. I think that points to some opportunity, particularly for investors that see Kroger as likely to accelerate reported same-store sale comps to around two percent (sell-side analysts expect 1.4-1.6% in 2018).
Striking my usual cautious approach, I do think that the recent rally seems a touch preliminary. With that said, I can see why some investors might be latching onto what they view as the beginning of a new cycle upward. The trend is certainly your friend, and management commentary and recent quarterly results seem to have established a viable move upward. Same-store sales comps are improving, margins are grinding upward, and the entire grocery complex is likely to be buoyed by inflationary pressures. It's always a tough call because I'd love exposure here and certainly would do so if afforded the opportunity to buy at prices from several months ago with today's data. That's the unfortunate side of being management agnostic; I try to invest in a vacuum irrespective of management cheerleading, and there has been plenty of that from Kroger management in recent quarters. To be fair, there was plenty of it all the way down as well.
Looking forward on what to watch during the Q4 full-year earnings release on March 7th beyond margins and same-store sales comps, nearly all investors familiar with the company know the firm is embarking on a turnaround strategy to win the battle of grocery. That isn't as simple as it used to be, and Kroger is embarking into unknown territory via its online ordering platform ("Clicklist") and relationships with third-party partnerships like Uber, Roadie, and others. Rumors around acquiring Boxed.com bolster the likelihood of continued investment in digital. I think most longs admit that the company was a little late to the digital game, but the company's appeal to the demographic base likely allows it to play catch-up with minimal harm done. I think this is a key area to watch, despite its relative immateriality to near-term results. As far as predictions - I know you all want me to stick my neck out - I believe Kroger comps 1.3% same-store sales comps on $30,800mm in revenue and $0.62/share in earnings. That's in-line revenues, off a penny on analyst consensus earnings per share.
This article was written by
Michael Boyd is an energy specialist with a decade of experience in both the investment advisory and investment banking spaces, with stints in portfolio management, residential mortgage-backed securities, derivatives, and internal audit at various firms. Today, he is a full-time investor and "independent analyst for hire.”
Michael leads the Investing Group Energy Investing Authority. The service focuses on finding total return opportunities within the energy sector, ranging from upstream producers to pipelines to refineries. Features include: model portfolios, real time trade alerts, high quality research, and an active and vibrant chatroom of professional investors. Learn More.
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