It has been about a month since the last earnings report for Kroger (KR). Shares have added about 6.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Kroger due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Kroger’s Q1 Earnings Surpass Estimates, Increase Y/Y
The Kroger Co. came up with first-quarter fiscal 2020 results, wherein both top and bottom lines not only beat the Zacks Consensus Estimate but also improved significantly from the prior-year period. Notably, this was the second straight quarter of positive earnings surprise.
Driven largely by coronavirus-led demand, Kroger registered a sharp rise in sales across both brick-&-mortar stores and digital channels. Understanding the need of the hour, the company offered a no-contact delivery option, low-contact pickup service and ship-to-home orders. It also waived pickup fees with no minimum purchase requirements and continued to expand contactless payment solutions like Kroger Pay. Also, the company implemented pickup-only location in Cincinnati. Kroger has been making prudent investments to bolster omni-channel operations, improve supply chain and increase manpower to ensure swift customer service amid such challenging times.
Kroger posted adjusted earnings of $1.22 per share that surpassed the Zacks Consensus Estimate of $1.12 and increased sharply from 72 cents reported in the prior-year quarter.
Total sales of $41,549 million came ahead of the Zacks Consensus Estimate of $40,934 million. The metric increased 11.5% year over year. Excluding fuel and dispositions, top line improved 19.1% from the year-ago period. The company’s digital sales surged 92%, while identical sales, without fuel, grew 19% compared with 22% and 2%, respectively, reported in the preceding quarter.
Courtesy of unprecedented demand for products across grocery and fresh departments identical sales, without fuel remained higher in April and May, both up about 20%, as customers continue to eat more at home. In the first three weeks of the second quarter, digital sales were up in triple-digits.
Management anticipates identical sales, excluding fuel, to increase at an elevated level during the second quarter, although tapering from the trends the company has witnessed so far in the quarter. Impressively, Kroger envisions second-quarter earnings per share to be up in the mid-to-high single digit range.
We note that gross margin increased 210 basis points to 24.3%. FIFO gross margin, excluding fuel, expanded 44 basis points from the year-ago period owing to sales leverage related to shrink, transportation, warehousing and advertising expenditures. Adjusted FIFO operating profit came in at $1,453 million, up from $957 million reported in the year-ago period.
Although management did not reiterate or provide new projection for fiscal 2020, it expects the company to surpass the guidance shared on Apr 1. The company had earlier projected fiscal 2020 earnings between $2.30 and $2.40 per share, identical sales, excluding fuel, to be above 2.25% and adjusted FIFO operating profit in the band $3-$3.1 billion.
Other Financial Aspects
Kroger ended the quarter with cash of $425 million, total debt of $13,471 million, and shareowners’ equity of $9,328 million. Net total debt decreased by $2,255 million over the last four quarters. Management still expects to incur capital expenditure of between $3.2 billion and $3.4 billion in fiscal 2020.
Kroger, which operates in the thin-margin grocery industry, has been making every effort to strengthen position not only with respect to products but also in terms of the way consumers prefer shopping grocery. The company has been focusing on plant-based products and eyeing technological expansion. Notably, the company’s “Restock Kroger” program involving investments in omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization, and lowering of expenses has been gaining traction.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision flatlined during the past month.
At this time, Kroger has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Kroger has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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