Kroger Is A Casualty Of The Grocery Price War

Recent data points indicate a significantly more aggressive promotional environment in food retail as a result of the intensifying deflationary cycle, Credit Suisse’s Edward J. Kelly said in a report. He added Kroger Co KR would likely be the worst affected by the current environment.

Analyst Kelly maintained a Neutral rating on the company, while reducing the price target from $34 to $29.

Price War Returns

The current environment is similar to that in 2009, when significant deflation had resulted in a grocery price war and the industry suffered multiple quarters of declining earnings. Conventional grocery companies would be the worst affected since they are “highly sensitive to sales weakness given the large cost structure of the model,” Kelly commented.

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Food retail has witnessed a recent ramp in promotional activity, which could be a cyclical issue related to deflation, and such competitive initiatives could ease once the top-line trends improve, the analyst mentioned. He added, however, that the price war of 2009 had continued for three to four quarters before easing.

Whole Foods Market, Inc. WFM has recently announced plans to reduce prices, which is a “new headwind that could create additional pressure,” Kelly stated.

Kroger

The EPS estimate for 2016 has been reduced from $2.19 to $2.05 to reflect marginally weaker comps with intensifying deflation and gross margin contraction due to more aggressive promotions. “We believe there will be a time to own this stock again, but the risk/reward is still not favorable enough,” the analyst wrote.

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