Wells Fargo thinks Kroger (NYSE:KR -0.6%) is lined up to top earnings expectations with its Q1 report on June 16, but is cautious on the stock for the months ahead.
Even though Kroger (KR) sets up as a defensive name in a tough market backdrop, analyst Edward Kelly and team noted that the buy-side bar is high on KR and there are growing risks for the grocery store operator's margins.
"A key driver of grocery earnings upside has been the industry's success at passing through pricing while mostly protecting margins, but competition seems bound to increase with sustained double-digit inflation and consumers starting to seek value. In addition, rising diesel prices looks like a material cost headwind, the company is lapping a sizable vaccine tailwind, and labor costs are rising. "
Wells Fargo has slotted at Underweight into the earnings report and said it sees better defensive options in the consumer sector. The firm points to Dollar General DG and BJ's Wholesale Club Holdings BJ as two retailers that could take market share during an economic downturn.