Kroger's Turnaround: No One Said This Was Going To Be Easy

By most accounts, Kroger Co KR isn’t really a standout in the grocer league. The firm reported in-line earnings per share and a marginal revenue beat Friday, but lately it’s done little to draw eyes from all-star rivals.

“Competition remains intense, led by Wal-Mart Stores Inc WMT’s price investments and better execution and the ongoing expansion of hard discounters (Aldi, Lidl),” Deutsche Bank analyst Shane Higginswrote in a Monday note. “Amazon.com AMZN’s acquisition of Whole Foods will not make for an easier environment in 2018.”

Between such opposition and Kroger’s “surprisingly modest” second-half guidance for non-fuel ID, Higgins expects sales and earnings growth below historical averages for the next two years.

He downgraded Kroger to a Hold with a $21 price target.

Competitive Potential

In some cases, the fierce grocery field may play to Kroger’s advantage.

“We continue to believe that KR is well-positioned to gain share from the many weaker competitors in the market who are likely to close doors over time,” Higgins wrote. “However, we expect store closings and acquisitions to be sporadic and will likely play out over the next several years.”

At the same time, Kroger is expected to accelerate investments in customer experience trends such as e-commerce.

“[This] will be critical in positioning the business for long-term growth during a period of rapid change in the U.S. food retail landscape where the lines between traditional grocers, online competitors, discounters and restaurants are becoming increasingly blurred,” Higgins wrote.

Deutsche Bank foresees low single-digit growth in earnings before interest, tax, depreciation and amortization (EBITDA) over the next few years accompanied by a below-average multiple.

After the stock waned a full 7.5 percent Friday, Kroger opened Monday at $21.06.

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Image Credit: By WhisperToMe - Own work, CC0, via Wikimedia Commons