What To Do With Kroger's Stock?

Kroger Co KR reported Thursday its third-quarter results highlighted by a top-and-bottom line beat, but a miss on the same-store sales line.

Street analysts were mixed in their reaction with some recommending investors buy the stock and others suggesting to sit on the sidelines.

The Analysts

Bank of America's Robert Ohmes maintains a Buy rating on Kroger's stock with a price target lifted from $35 to $37.

BMO Capital Markets' Kelly Bania maintains at Market Perform, unchanged $28 price target.

Bank Of America: Favorable Risk To Reward

Kroger benefited in the third quarter from continued cost controls as part of its "Restock execution" while new profit streams helped drive EBIT $100 million above expectations, Ohmes said in a note. Identical sales of 1.6 percent were inline with the analyst's estimates and marks an improvement in the two-year stack which accelerated sequentially to 2.9 percent.

Kroger's identical sales could move higher and margins should also improve as headwinds from space optimization initiatives will shift to tailwinds in fiscal 2020, the analyst wrote. The company also appears to be on track to deliver $400 million in incremental EBIT and $6.5 billion in Restock cash flow through fiscal 2021.

Given a strong third quarter and encouraging outlook, Ohmes said Kroger's stock is trading at a favorable risk-reward at current levels. The research firm's new $37 price target is based on 16 times fiscal 2020 EPS of $2.30, which is a multiple that is more in-line with its long-term average and the food and discount retail group average.

BMO: Identical Sales Matter

Kroger's quarter is highlighted by near-record high gas margins and strong cost controls but these benefits didn't translate to an upward revision to the company's outlook, Bania said. This marks a shift from prior years when the company re-invests gas upside.

Bania said this creates a dilemma for management where it may need to flowing through some of its profits to the bottom line as opposed to merely reinvesting in the business, especially if identical sales don't accelerate. In fact, the research firm's estimates are assuming in-store comps are tracking slightly negative.

Kroger is still in an investment phase while there is still some risk of heightened volatility and poor earnings during this period, the analyst wrote. As such, a neutral stance on the stock is warranted at this time.

Price Action

Shares of Kroger traded around $29.27 at time of publication Friday morning.

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