What To Make Of Longtime Kroger CFO's Retirement

Grocery chain Kroger Co KR on Monday announced CFO J. Michael Schlotman will retire from the company in one year after holding the title since 2000. Schlotman will be replaced by Gary Millerchip, CEO of Kroger Personal Finance, in April 2019 at which point Schlotman will remain an executive vice president through the end of the calendar year.

The Analysts

• Jefferies' Christopher Mandeville maintains a Buy rating on Kroger with a $34 price target.
• Wells Fargo's Edward Kelly maintains at Outperform, $36 price target.
• Bank Of America's Robert Ohmes maintains at Buy, $37 price target.

Kroger's stock traded down about 1.5 percent to $28.49 at time of publication Tuesday afternoon.

Jefferies: Incoming CFO Is Little Known

Schlotman's retirement announcement was "speculated for some time" and Kroger has given "significant advance notice" of a change in leadership, Mandeville said in a note. The timing coincides with the ongoing "Restock program," which remains in an investment phase and will prove to be "defining one" for Schlotman's legacy. As such, the company will likely do "everything in its powers" to show progress with EBIT growth likely to be seen in the second quarter of 2019.

Meanwhile, the analyst says little is known of Millerchip but the Kroger Personal Finance division recorded a record year and receives "high praise" from Kroger's top management. Under his leadership the Personal finance business grew at a double-digit rate year-over-year for the past eight years and his promotion is a sign he can help in the company's goal of realizing $400 million in incremental EBIT by 2020.

Related Link: What To Do With Kroger's Stock?

Wells Fargo: Difficult Leadership To Follow

Schlotman spent more than three decades with Kroger and was an integral part of the early 2000s re-positioning and the current "Restock" initiative, Kelly said. As such, his leadership role will be "difficult to follow," especially in the very difficult unionized supermarket segment which continues to evolve to digital.

Kelly said the Street was skeptical of Kroger's 2020 financial goals, but Schlotman's retirement announcement "should only raise further doubt." The incoming CEO does have the confidence of senior management, but the analyst thinks he hasn't "had enough interaction with him to pass judgment."

Bank Of America: Millerchip Announcement Expected

Millerchip was a leading candidate to serve as CFO since September 2017 as he has attended all Restock executive meetings, Ohmes said. As such, Millerchip's promotion is likely part of a "planned and thoughtful" transition and comes at a time when the Restock initiative is seeing strong momentum.

The risk-reward profile on Kroger's stock is favorable and the firm's $37 price target is based on 16 times fiscal 2020 estimated EPS. The multiple is consistent with average of the food and discount retail group and justified given the company's price leadership, strong execution and expectations for 7 percent to 8 percent EPS growth.

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