Ahead Of Kroger's Q4 Report, Two Key Questions From Loop Capital Markets

Kroger Co KR is scheduled to report fourth-quarter results before Thursday's market open, and Loop Capital is expecting a "solid" print — but said two key questions stand in the way of a bullish stance on the grocer.

The Analyst

Loop Capital Markets' Andrew Wolf maintains a Hold rating on Kroger's stock with an unchanged $28 price target.

The Thesis

Kroger could surprise investors with an earnings beat in its Q4 report if the gross margin expansion seen in the third quarter is more sustainable than previously expected, Wolf said in a Wednesday note.

Kroger's 2018 outlook is of some concern, and the analyst said he has two key questions for management.

Kroger said in its third-quarter report that its margin expansion is due to more aggressive category management, a better sales mix and lower shrink and vendor fines for substandard performance, Wolf said.

The question for management is how sustainable the gross margin expansion trajectory is for Kroger, the analyst said. It may be reasonable to assume that category management and sales mix should continue to contribute to margin expansion, even if shrink and logistics fines won't, Wolf said. 

Loop's second question for Kroger: What extent is any earnings growth from the "Restock Kroger" initiative back-end loaded?While the company does expect to generate $400 million of incremental operating profit from 2018 to 2020, Kroger's initial 2018 guidance implies the $400 million appears to be back-end loaded, Wolf said. It also appears the company is looking to expand its year-over-year EBIT growth from zero or lower in 2018 to an average  of 5.5-percent growth in 2019 and 2020.

This growth rate "would not be unprecedented," as Kroger saw multiyear periods of EBIT growth from 2005 to 2008 and from 2011 to 2015, according to Loop Capital Markets. 

Price Action

Kroger shares were falling more than 5 percent to $26.58 at the time of publication Wednesday afternoon. 

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