Kroger (KR) 2nd Quarter Earnings: What to Expect
Shares of Kroger (KR), which have fallen 7% year to date and 19% in twelve months, haven’t delivered the sort of returns investors expected. The decline has been due to a combination of factors, namely slowing growth, particularly at a time when rivals have enjoyed strong revenue.
But is now the time to bet on a recovery?
The supermarket giant is set to report second-quarter fiscal 2020 earnings results before the opening bell Thursday. The company has a lot to prove amid concerns about the health of its business model. While retailers like Target (TGT) and Walmart (WMT) have shown they can leverage their scale and execute to withstand the lingering trade tensions, Kroger has suffered erosion in its operating margins.
After having delivered below 2% revenue growth for the past several quarters, versus 3% growth for Walmart, Kroger management is optimistic that second-quarter results will show improvement. The company believes it will continue to grow market share as the year progresses. And with Kroger stock trading at just 10 times earnings, the shares are cheap enough to produce a significant bounce if Thursday’s second-quarter results come above expectations -- but that’s a big if.
In the three months that ended July, the Cincinnati, Ohio-based company is expected to earn 41 cents per share on revenue of $28.38 billion. This compares to the year-ago quarter when earnings came to 41 cents per share on revenue of $27.87 billion. For the full year, ending January, earnings of $2.17 per share would rise 2.85% year over year, while full-year revenue of $122.95 billion would increase 1.5% year over year.
The company is working to adapt to the fundamental change taking place in the grocery industry, such as the impact of technology as consumers move more towards online shopping and delivery. To that end, Kroger is working to is changing its model and has embraced new initiatives such as digital coupons which shoppers can use for online orders and in-store pickup. It has also adopted a program which it calls “Restock Kroger,” which encompasses capital investments, cost savings and free cash flow growth all aimed at returning shareholder value.
While these are gaining traction, investors want to know how will they boost Thursday’s results. In the first quarter, the company reported revenue of $37.3 billion, compared to $37.7 billion for the same period last year. Stiff competition and an aggressive promotional environment have been the primary headwinds for compressing margins. Q1 adjusted EPS was 72 per share, compared to 73 cents a year ago. The decline was due to lower profit margins, which decreased 40 basis points from a year ago.
On Thursday, analysts will want to see if Kroger can improve on the numbers. But profitability will be tough to swing. Not only is Kroger aggressively working toward more convenient grocery delivery options, but it also acquired meal-kit provider, Home Chef, to bolster omnichannel capabilities. These investments are aimed at growing revenue and market share, but they could further shrink profitability. With a 2.5% yield, combined with a cheap stock price, the risk-reward look favorable.