Deutsche Bank: Kroger Likely To Improve In Q2, Shares 'Attractive' Despite Competitive Pressure

Kroger Co KR shares have dropped 11 percent since Amazon.com, Inc. AMZN bought Whole Foods in June, and the stock has been hit harder by the deal than it deserves, according to Deutsche Bank.

The Cincinnati-based grocery chain reports second-quarter results on Sept. 8.

The Amazon-Whole Foods deal has added uncertainty, though, in an environment of intense competition for Kroger from names such as Wal-Mart Stores Inc WMT and discount grocers such as Aldi and Lidl, analyst Shane Higgins said in a Friday note.

Kroger is down 36.6 percent year to date.

“The Amazon/Whole Foods-related sell-off is largely overdone for Kroger, in our view, given that Whole Foods accounts for just 2 percent of the U.S. grocery market and given the limited overlap in key regions such as the Midwest,” Higgins said.

Kroger shares “look attractive” due to non-fuel ID sales and margins that Deutsche Bank expects to improve on the basis of share gains and modest inflation, the analyst said.

Deutsche Bank maintains a Buy on Kroger with a $26 price target.

The firm is projecting a Q2 EPS of 42 cents for Kroger, 2 cents above consensus but down 12 percent from the adjusted EPS of 47 cents reported one year ago.

What To Expect From Q2

Non-fuel ID sales are projected to rise 0.5 percent, according to Deutsche Bank.

Kroger is operating in an atmosphere of improving inflationary trends and is making price and incremental labor investments, Higgins said.

The chain is continuing to roll out ClickList, an online ordering service with in-store pick-up, the analyst said.

Kroger could see “noise” related to Hurricane Harvey, Higgins said: The company has 111 stores, or 4 percent of its base, in the Houston division.

Investors should watch for the following from Kroger on Sept. 9, according to Deutsche Bank:

• Updates on fiscal 2017 guidance.
• Updates on Kroger’s competitive landscape.
• The effectiveness of the company’s price investments and promotions.
• Inflationary trends and Kroger’s ability to pass-through rising costs.
• Updates on labor costs.
• Commentary on ClickList and Kroger’s digital initiatives.

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