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Is The Crash In Kroger Stock An Opportunity?

Mar. 09, 2018 11:23 AM ETThe Kroger Co. (KR)AMZN22 Comments
L&F Capital Management profile picture
L&F Capital Management


  • KR stock took a beating after the company delivered a bad profit guide.
  • Most of the tax reform windfall is going back into the business to stave off competition.
  • KR stock is now very cheap.
  • We see 15% upside over the next 12 months.

Average fourth quarter numbers and an ugly fiscal 2018 earnings guide have sent Kroger (NYSE:KR) stock reeling to levels not seen since Amazon (AMZN) first acquired Whole Foods. Although we do not think Kroger stock will be a big winner in the long term as competitive headwinds will persist into the foreseeable future, we do think that this sell-off has plunged the stock into undervalued territory. We are optimistic that shares can head higher from here, and realistically see 15% upside over the next 12 months.

Despite the stock price reaction, the quarter wasn't all bad, and current trends still support the thesis that Kroger will be around for the next 10-plus years as the biggest grocer in the United States.

Comparable sales growth accelerated to 1.5%, from 1.1% last quarter. On a two year stack basis, comparable sales growth is also positive (up 0.8%), so concerns about Whole Foods, Walmart (WMT), Target (TGT), and others eating Kroger's market share seem to be slightly overdone. Indeed, Kroger actually gained market share in the quarter, according to management.

Meanwhile, digital sales are soaring (up 90%) as the company is starting to flesh out its omni-channel presence. The company's ClickList program has rolled out to 1,000 locations, and Kroger is successfully building out a grocery store chain with comprehensive buy-online, pick-up-in-store capability. In addition to an enhanced customer experience, Kroger is also successfully building out its organic and private-label brands. Sales of organic foods are soaring, while private label brands recorded record unit share in 2017.

This is all very critical to the Kroger growth story. Robust digital sales growth coupled with enhanced omni-channel capability means that Kroger is successfully adapting its business to be more convenient for digital-oriented consumers, and more competitive to Amazon-enhanced Whole Foods locations. Organic food growth

This article was written by

L&F Capital Management profile picture
L&F Capital Management, LLC, is a quantitative investment management group located in San Diego, California. Our multi-strategy investment approach comprises a mix of event-driven trades and long-term value investments, utilized together to maximize profit in both short and long term scenarios. We maintain consistency in portfolio mix through our long-term value holdings, but stress flexibility in portfolio mix from our daily event-driven trades. We believe this mix of flexibility and value generates both short and long term profits while reducing exposure to market volatility. L&F also shares various trade and investment opportunities through Seeking Alpha. For more information, visit www.lfcapitalmanagement.com.

Analyst’s Disclosure: I am/we are long KR, AMZN, TGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

Green Elmo a.k.a. User 48289781 profile picture
"Get the logistics in place and EVERY store becomes a distribution warehouse. "

How is that? Taking inventory off the store shelves to ship to a retail address doesn't seem very efficient.

And no, there is not a lot of extra space in the back room of a Kroger supermarket. Take a look into a Kroger store back room some time.
KR is playing catch up with WalMart and Amazon and turning around over 2,000 stores and getting into online will continue putting on pressure for the time being.
Clauser1960 profile picture
The fairy tale of people shopping for fish, cheese, vegetables and fruits at Amzn...it makes me laugh so loudly...and I am long Amzn with 20% of my stock portfolio. A good 2% for Kr is plain common sense. Adding up, it is a fantastic defensive stock.
The largest percentage of shoppers still like to see there purchases before buying.

This is especially true with food. Meat, vegetables, fresh fruit would be at the top of that list.

Millennials have opted for ordering on line and having it delivered, so the "off" meat or rottten fruit can be sent back. How many deliveries are need for a $100.00 order? 2, 3, ?

How is there any profit in a 2% margin business when you have to deliver and pick up once or twice.

I have experienced this with AMZN. The end result was the delivered item was removed from my CC, rather than take it back. Good business move, but how do they make money? For me I won't order food items from AMZN, again.

KR has 8.9% of the US food business, next only to WMT. Where is AMZN? And what are their margins, negative I would guess!

I'll take my chances with a 10 multiple (current, KR) vs a 200 multiple (under estimated), AMZN.

I believe if it wasn't for the large profitability of AWS, AMZN would not be in ANY of these other businesses. Why doesn't AMZN break out their profits from other businesses? Likely, there are very little or NONE.

Most Millennials don’t have the $ for online regular ordering. Pizza specials perhaps. Where are the facts? Why blame the next leading generation for all the pits and falls. The leaders definitely have it all together as the boomers retire and do the last dance celebrations, travel, order online and take the kids to Disney. Take the millennials seriously, support them, and give them any advice. Because they will be cleaning up the boomer files and reorganizing the system and hopefully they include good thoughts of the boomers when they take over.
Writers and analysts use 'millennials' to death in arguments for and against companies for whatever is right or wrong. I'm not too sure what a millennial is anymore so large is the age span (depending on which definition you choose). Suffice to say that the generation gap is alive and kicking now as much as it was 2000 years ago. It will be the millennials to blame for everything when they have families with adult children (by which time they will be Costco members).
I shop at a KR branded store clean, stock people helpful enjoy shopping there.
KR will be a ok but I would wait on buying more of it.
There the best in the worse profit business.
Added more KR. Will add even more later. I don’t shop at KR, but I do admire a good business plan.
15% upside? Give me a break, it will do that in a week or two. it was up 4.8% today alone! Carries a PE of around 12, that is dirt cheap, people have to eat. Will be a slow riser going through competitive biz transformation, but with a PE of 12, I can wait.
I took a leap of faith in the old adage of an inefficient market and backed up the truck yesterday. Got close stops on the downside
VaslavN profile picture
Added to position last year ~ $21. If it goes down to $18-$19, lookin' to throw some more good $$$ after bad. ;-)
tdanzig profile picture
"EPS estimates for next fiscal year currently hover around $2.28, but we think those will come down to around $2.20 considering the weak fiscal 2018 earnings guide."

Per the conference call, the midpoint of FY2019 guidance was $2.05 (1.95-2.15). Where did you get $2.28? If you mean analyst estimates, I would stick with management guidance personally.
FreeMkts profile picture
2% dividend would make that 17% total return in one year. Also they have been increasingly aggressive with share buybacks - 6% reduction in TTM. Lots of FCF to apply to further share buy backs and management has been net buyers over the last six months.... seems like a nice defensive play with good rebound potential.
The Boxed snub was a big factor in yesterday's action in KR. And the day before as well (insider trading, anyone??).

For what it is worth, KR private label brands are some of the best in the entire marketplace. Also, the KR digital presence is getting much better. Still feels like a brick and mortar trying to be digital, but definitely much better than even two years ago.

It escapes me how ALL of the brick and mortar space is so spooked by AMZN. Get the logistics in place and EVERY store becomes a distribution warehouse. Talk about full network coverage. See rumors of AMZN acquiring TGT for support of that hypothesis.
David Harper, CFA profile picture
Thank you. I agree with your assessment. I sold KR in January for a +32.5% gain over ~ 3 months (see my article http://bit.ly/2Dffx6F). I believe it's back to ~ 18% discount to FMV.

I don't like it, but companies like KR just aren't well-suited for public markets which care about growth and margins. KR is never going to be high growth or high margin (and will always offer razor thin margins with mild growth prospects, alas). So i think its suitability depends on your style and risk tolerance. It definitely appears to give opportunities to trade for +15% if you are willing to time. But for me, public market investing is about relative opportunities, and I don't want to "hold my breath" every time they report the quarter. There are just better investing opportunities out there.
Agree with your assessment. Solid company in a highly competitive market. Yesterday’s action is easy but hard to justify. Witness today’s move back up. I would not be surprised to see KR back to $26-$27 in the next month or two.
id buy in again if it gets below 22.
Jim Cramer on Friday nights show said not to touch it..said it has an almost cult following that is ignoring union...poor top management..bad numbers and Amazon effect..expects it to go much lower...
Does following Cramer make you money?
Jim Cramer bats below 0.500 for his predictions. You are better off flipping a coin. He’s a talentless loudmouth who lucked into an easy TV gig. Not worth any air time.
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