Case Study on Kroger(KR) with Nobias technology
Summary
Kroger posted Q2 earnings this morning, beating on the top and bottom lines.
Management also raised its full-year EPS guidance.
Kroger is investing heavily into its digital ecosystem.
The stock's post-earnings rally has pushed shares up to credible analysts' average price target.
Kroger (KR) has been a top performer throughout 2022, showing its defensive nature during today’s volatile trading environment, with shares rising approximately 13.5% since the start of the year as opposed to the S&P 500, which has fallen by nearly 15% on a year-to-date basis thus far.
Kroger reported second quarter earnings this morning. The company’s beat and raise results have caused shares to rally. Today’s 5%+ move has pushed KR shares up towards the consensus fair value estimate provided by the credible analysts that Nobias tracks.
The Alpha Sieve, a Nobias 4-star rated author, published an earnings preview report at Seeking Alpha earlier in the week, highlighting Kroger’s past performance, consensus expectations coming into the Q2 results, and ultimately, providing an update on the author’s buy/sell/hold recommendation.
KR Sep 2022
The Alpha Sieve touched upon Kroger’s reliable operations, stating, “KR has a fairly decent track record in [sic] beating street estimates, particularly on the bottom-line front. Indeed, if you want to consider when KR last fell short of consensus EPS estimates, you need to rewind the clock by 11 quarters, back to October 2019, when it missed EPS estimates by 4%.”
Looking ahead, the author expects to see this trend continue. They stated, “with regards to the upcoming Q2 results, consensus currently expects EPS of $0.7986 on revenue of $34.19bn. Compared to Q1, this would represent some improvement at the EPS level (Q2 expected growth rate of 31%, vs 22% in Q1) but a continuation of the run rate seen in Q1 (+8% annual growth).” This opinion is in-line with management’s prior guidance.
The Alpha Sieve said, “At the end of the Q1 results, Kroger's management had scaled up their FY guidance by ~3%, lifting the EPS range from previous levels of $3.75-$3.85 to $3.85-$3.95.” However, noting caution, they continued, “Consensus EPS estimates are currently only 0.5% lower than the upper end of that range at $3.931, so the potential for upside surprises isn't a lot.” And, due to the lack of upside potential the author expressed concern about the stock’s valuation.
With regard to KR’s free-cash-flow yield, the author wrote, “Currently, KR stock only yields 6.93%, below its 5-year average of 7.67%.” But, as The Alpha Sieve points out, KR has been a defensive stock that has provided investors with strong shareholder returns throughout recent volatility.
Kroger’s dividend yield is currently 2.15%, which is well above the S&P 500’s 1.50% level. Kroger is known for increasing its dividend. The stock is on a 17-year dividend growth streak. And, as The Alpha Sieve points out, the company has been generous with its stock buyback program as well.
Touching upon Q2 shareholder returns, The Alpha Sieve said, “It would also be interesting to keep track of the level of buybacks Kroger did in Q2. Just for some perspective, in Q1 they were pretty aggressive doing around $552m of buybacks (the most for a quarter in three years), accounting for over half of the $1bn buyback program launched in late December last year.”
But, even with increasing dividends and share buybacks in mind, the stock’s valuation continues to be a concern for this author. They concluded their report writing, “whilst Kroger has some useful defensive qualities, I don't see any great incentive in entering this stock at this juncture. Would prefer to stay on the sidelines. The KR stock is a HOLD.”
Russel Redman, a Nobias 5-star rated author, also posted a pre-earnings article this week at Supermarket News; however, instead of focusing on fundamental metrics, Redman’s piece put a spotlight on Kroger’s technological innovation and long-term growth opportunities, striking a more bullish tone.
Redman’s piece highlighted Kroger’s omni-channel approach to retail, quoting Yael Cosset, senior vice president and chief information officer, who said, “Our aspiration is to be the destination for our customers for their food needs. At the heart of our vision for a seamless ecosystem is the precise understanding of our customers.” “Unsurprisingly,” Redman continued, “technology is playing a central role.”
Regarding Kroger’s operations, Redman said, “Overall, The Kroger Co. operates 2,723 supermarkets and multi-department stores under more than 20 banners. More than 2,250 stores have pharmacies, and over 1,600 have fuel centers. Eighty-two percent of Kroger’s customers within five miles of one of its stores, with most living within two miles.”
Redman noted that the company aims to leverage this market penetration to collect consumer data and become more efficient in the new digital age. He wrote, “Kroger, which serves more than 60 million households annually, is leveraging the vast stores of data from across its physical and virtual properties and brands to create more personalized experiences and value for customers.” He touched upon new logistics investments that Kroger is making into “Spoke” facilities via a four-year partnership with Ocado Group.
Regarding these facilities, Redman said, “These high-tech facilities use Ocado’s automation and artificial intelligence technology to fill online grocery delivery orders, including in markets where Kroger doesn’t have physical stores.”
At a high level, Redman said that this company hopes to use the automation and the consumer data that it collects to “hone its supply chain to improve product freshness, expedite pickup and delivery service, and introduce new, on-trend items in its Our Brands portfolio.”
Overall, he stated, “Digital represents a more than $10 billion annual business for Kroger.” He noted, “About 18.5 million households engaged online with the retailer in 2021.” And he notes that this trend is just getting started due to KR management’s focus on using technology to develop a “seamless ecosystem” for customers moving forward.
Kevin Coupe, a Nobias 4-star rated author, also recently highlighted KR’s logistical infrastructure build out in a report published at Morning News Beat, where he stated, “Kroger announced yesterday that it has opened "two new spoke facilities in Greater Nashville and the Chicago Metro Area. Serving as last-mile cross-dock locations, the new spokes will operate as a seamless extension of regional fulfillment centers, making Kroger Delivery available to more customers in Tennessee and Illinois.”
When Kroger reported earnings this morning, the company beat Wall Street estimates on both the top and bottom lines. KR produced Q2 sales of $34.64 billion, which represented 9.3% year-over-year growth, coming in $200 million ahead of consensus estimates. KR’s Q2 non-GAAP EPS totaled $0.90/share, beating consensus estimates by $0.07.
Kroger management highlighted 10.2% growth in its Our Brands category, which helped the company maintain profit levels in the face of rising inflation and raw material costs. Kroger’s gross margin came in at 20.9% for the second quarter, up by 2 basis points on a year-over-year basis.
The company said that its digital sales increased by 8% on a year-over-year basis. The company’s CEO, Rodney McMullen, said, “Our consistent performance underscores the resiliency and flexibility of our business model, which enables Kroger to thrive in many different operating environments. We are applying technology and innovation to improve freshness, grow Our Brands, and create a seamless shopping experience so our customers can get what they want, when and how they want it, with zero compromise on quality, selection and affordability.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
With regard to shareholder returns, Kroger’s earnings press release stated, “Earlier this quarter, Kroger increased its dividend by 24%, marking the 16th consecutive year of dividend increases. Additionally, during the quarter, Kroger repurchased $309 million in shares and year-to-date, has repurchased $975 million in shares. On September 9th, the Board of Directors authorized a new $1 billion share repurchase program.”
And, Kroger’s CFO, Gary Millerchip, also used the Q2 report as an opportunity to raise full-year guidance, yet again. Millerchip said, “Our consistent execution of this strategy is building momentum in our business which, combined with sustained food at home trends, gives us the confidence to raise our full-year guidance. We now expect identical sales without fuel to be in the range of 4.0% to 4.5% and adjusted net earnings per diluted share in the range of $3.95 to $4.05.”
Overall, this beat and raise quarter caused KR stock to pop during Friday’s trading session. At mid-day, shares were up by more than 5%. Coming into the Q2 report the average price target for KR shares amongst the credible analyst community that Nobias tracks was $51.25. That’s almost exactly where the stock trades at the moment - currently, KR shares are valued at $51.94.
Currently 68% of recent articles written by credible authors that the Nobias algorithm tracks have expressed a “Bullish” sentiment. Our algorithm hasn’t reported any new analyst updates on the stock which would reflect this updated 2022 guidance. We expect to see this occur in the coming days, which could send the average analyst price target higher.
Disclosure: Nicholas Ward has no KR position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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