Shares of Kroger KR have fallen over 11% this year, due in part, to a Q4 earnings miss and lower-than-projected 2019 guidance. Despite the downturn, Kroger has pushed deeper into delivery and e-commerce as part of its 'Restock' initiatives in order to keep up with rivals Walmart WMT , Costco COST , and Target TGT in the Amazon AMZN age.
Overall, the first quarter has been relatively strong for retailers, so let's look at what investors should expect from Kroger to see if they should consider buying KR stock heading into its Q1 earnings release.
Quick Industry Overview
Kroger could be under more pressure to impress Wall Street this quarter after peers Target and Walmart both posted strong quarterly results. Target posted 4.8% comparable sales growth in Q1 and 42% digital expansion. The Minneapolis-based retailer said that offerings such as Order Pick Up, Drive Up, and Shipt helped drive e-commerce growth.
Meanwhile, Walmart's U.S. comp sales popped 3.4%, which marked its strongest first-quarter growth in this vital retail category in nine years and the fourth straight period of 3% or better comps expansion. Costco also posted better-than-expected earnings recently and saw the continued expansion of its e-commerce business. As a whole, 38 of the 39 retailers in the S&P 500 have reported at this point, with total earnings for these companies up +12.2% from the same period last year on +7.9% (also read: Taking Stock of the Earnings Picture ).
Kroger & Fundamentals
Kroger's digital sales soared 58% in 2018. The Cincinnati, Ohio-based firm also expanded its Pickup and Delivery offerings to reach a total of "91% of Kroger households." Investors should also note that Kroger has made deals with different firms to expand its reach and modern retail business. This includes a partnership that will see Kroger sell select offerings at a small number of Walgreens WBA stores on a trial basis.
On top of that, KR announced at the start of 2019 that it partnered with Microsoft MSFT to "pilot a connected store experience." Plus, Kroger has experimented with driverless delivery in partnership with robotics firm Nuro. The largest grocery chain in the U.S. also recently broke ground on a high-tech fulfillment center. "Our partnership with Ocado will introduce transformative e-commerce, fulfillment and logistics technology in the U.S. and bring customers fresher food faster than ever before, accelerating our ability to provide anything, anytime, anywhere," Kroger CEO Rodney McMullen said in prepared remarks on Wednesday.
Despite all of its growth plans, the company that boasts 2,764 stores under a variety of banners, has failed to spark investor confidence. KR stock is now down roughly 32% in the last three years, compared to its industry's 19% average climb. Kroger stock closed regular trading Friday at $24.26 per share, which marked a roughly 25% downturn compared its 52-week high of $32.74. This decline could, however, give the stock some room to run if Kroger posts strong Q1 results and or provides improved guidance.
Kroger currently pays an annualized dividend of $0.56 per share, with a 2.27% yield. The company has raised its dividend for 12 years in a row. On top of that, Kroger stock is currently trading at 10.8X forward 12-months Zacks Consensus EPS estimates. This marks a discount compared to its industry's 18.2X average and its own five-year high of 21.2X and 14.3X median. KR's price/sales ratio of 0.16 also falls below its industry's 0.23 average. These solid valuation metrics help Kroger earn an "A" grade for Value in our Style Scores system.
Outlook & Earnings Trends
Looking ahead, our current Zacks Consensus Estimate calls for Kroger's first-quarter revenue to dip 2% to hit $36.78 billion. Last quarter, sales fell 9.5% to $28.1 billion. At the bottom end of the income statement, KR's adjusted quarterly earnings are expected to slip 1.4% to $0.72 per share. The company's fourth quarter 2018 earnings fell from $0.63 in Q4 2017 to $0.48 and missed our $0.53 estimate.
Along with its negative quarterly outlook, Kroger has seen its earnings estimate revision activity trend in the wrong direction recently. This brought its Q1 estimate down by $0.01 over the last 30 days.
Kroger is currently a Zacks Rank #3 (Hold) that has seen its stock price sink in 2019 as the broader industry climbs. With that said, investors might be best served to closely watch Kroger over the next week to see if the company can prove to Wall Street that its e-commerce and growth plans will start to pay off.
Kroger is scheduled to release its first-quarter fiscal 2019 financial results before the opening bell on Thursday, June 20. Make sure to come back to Zacks for a full breakdown of KR's actual quarterly metrics.
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