Kroger Drop: A Buying Opportunity?

About: Kroger Co. (KR)
by: Christopher Price

Kroger reported second-quarter earnings on September 13.

The company showed some mixed results, disappointing on the sales number.

After a quick 10-percent drop, is this a buying opportunity?

Kroger (KR) is one of the leading grocery chains in the US. As far as chains that are primarily grocery stores, Kroger leads the way with 2017 sales of more than $122 billion. While Walmart (WMT) has about four times the annual sales of Kroger at more than $0.5 trillion, much of its revenue comes from non-grocery products.

Kroger operates nearly 2,800 grocery stores, which provide nearly 93 percent of the company's revenue.

On September 13, the company's second-quarter results came out. There were some data points that were quite encouraging. After making adjustments, full-year earnings guidance remained the same. While not great, this was definitely better than a reduction in the guidance.

The adjusted net income was up from the same period during 2017, rising from $0.39 per share to $0.41 in the most recent quarter. This was another solid statistic. Analysts had anticipated an EPS number of $0.37. The net income number was $508 million, as opposed to $353 million in the same quarter last year.

The problematic number was related to sales, which came in about $100 million below the number anticipated by analysts. In spite of coming in below estimates, the company was able to raise its sales number on a year-over-year basis by about $290 million. Kroger anticipates a 2 percent growth in sales over the next year.

While there were some points that were quite positive, the sales number was enough to hurt the stock price.

A 10-Percent Drop

Kroger closed at $31.73 on September 12, the day before the announcement. This price was just $1.01 off of its 52-week high. Upon hearing the somewhat disappointing sales number, the stock is now down right around 10 percent on the day, hovering in the $28 range since the market's open.

Other Positives

In addition to the increase in net income, KR rewarded shareholders over the past year by repurchasing 103 million shares for $2.6 billion. This has dropped the number of outstanding shares by more than 10 percent.

The company has also returned money to shareholders through a quarterly dividend payment. Just this year, Kroger increased its dividend payout by 12 percent, which brought its streak to nine straight years with an increase.

The current payout ratio after the 10-percent drop in the share price is 26.4 percent and the yield is 1.96 percent. This means that only one in four dollars of net income is going toward dividend payouts.

Therefore, KR should have some room to increase the dividend in the future. Additionally, fewer shares outstanding will mean that the amount of cash needed to pay out higher dividends will be less.

The company anticipates GAAP earnings that are much higher than the adjusted $2.00 to $2.15 number provided above. By using the low end of the adjusted projected net income of $2.00 per share, Kroger is now trading at slightly more than 14 times anticipated earnings. If it is able to hit the higher end of this range, and analysts expect $2.12 for the year, the ratio looks even better. This is well below the S&P's current PE ratio of more than 25 times earnings.

While no one knows when the next recession will hit and what stock prices will do over the short term, Kroger is a solid company in an industry that is somewhat recession proof. People have to eat. Additionally, Kroger is making investments in technology that will improve the customer experience like Kroger Ship, which is an attempt to bring more convenience to customers. This drop in the share price provides a better entry point for those looking to invest in the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: I am not an investment professional. This article is intended for educational/entertainment purposes only and is not a recommendation to buy any company. Be sure to do due diligence before investing in any security, as a loss of all invested capital can occur.