Wall Street Debates Kroger After Disappointing 2018 Outlook

Grocery giant Kroger Co KR reported fourth-quarter results that were mostly in-line with expectations, but its outlook for the full fiscal year sent the stock lower last week. 

The Analysts

• BMO Capital Markets' Kelly Bania maintains a Market Perform rating on Kroger's stock with a price target lowered from $31 to $27.
• Morgan Stanley's Vincent Sinisi maintains an Equal-weight rating on Kroger's stock with a price target lowered from $29 to $26.50.
• UBS' Michael Lasser maintains a Neutral rating on Kroger's stock with a price target lowered from $30 to $26.

BMO: Concerns Beyond Headline Numbers

Kroger's earnings report was in-line with expectations on the headline numbers, but were weak when considering other reported metrics, Bania said in a research report. For example, comps of 1.5 percent was a "weak" figure when considering the 31-basis-point decline in gross margin percentage, the analyst said.

Product cost inflation moved higher from 0.5 percent in the fiscal third quarter to 1 percent in the fourth quarter at a time when retail inflation remained below product cost inflation, according to BMO Capital Markets. 

Kroger's savings from recent tax legislation will allow the company to pull the timing of its three-year "Kroger Restock" plan forward, the analyst said. The company's incremental investments in the business are small and mostly focused on improved employee education and retirement, which should not make investors incrementally more constructive on the grocer's outlook, Bania said. 

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Morgan Stanley: This Is the Core Issue

Kroger's status as the leading conventional grocery operator remains unchanged, and the management team remains confident its initiatives can support long-term appreciation in the stock, Sinisi said in a research report. Kroger plans to focus on data,personalization and an optimized store experience with a focus on private brand items and digital initiatives, he said.

While this may be commendable, the core issue within the entire food retail space remains the "high degree of bottom line uncertainty" given multiple and ongoing changing competitive dynamics, Sinisi said. 

UBS: Kroger Is Fairly Valued 

Kroger's earnings report was strong and highlighted by its strongest core ID sales result — 1.5 percent — since the second quarter of 2016, Lasser said in a research report. But at the same time, the earnings report showed a sequential slowdown on Kroger's multiyear stacks, despite pulling forward some of the investment dollars in the quarter, the analyst said. 

Kroger's management is taking the right steps to better compete in the $1.5-trillion food market, but its investments are "costly" and investors shouldn't expect any margin expansion "anytime soon," Lasser said.

Kroger's stock looks balanced at current levels, according to UBS. 

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