Will Kroger Get Dragged Into The Amazon, Wal-Mart E-Commerce Conflict?

In a note released on Friday, Oppenheimer delved on whether the Amazon.com, Inc. AMZN versus Wal-Mart Stores Inc WMT e-commerce battle will bring Kroger Co KR into the fray.

E-Commerce Battle Lines Drawn

Analysts Rupesh Parikh and Erica Eiler said they have been closely watching both Amazon and Wal-Mart, with the latter being observed on its e-commerce efforts, including the recently launched free two-day shipping offer for orders valued at over $35. Though the analysts view the offer as attractive, they aren't clear on how Wal-Mart pays for it.

According to the firm, Kroger's superior technology prowess in the grocery sector may help it to better adapt to a likely shift toward e-commerce, particularly for center-of-store type categories. The firm also took cognizance of the fact that the management has been quietly experimenting with many different technology offerings/platforms.

Oppenheimer said overall its views on Kroger do not materially change from last summer, as it continues to play for a potentially better comp trajectory later in 2017 or early 2018.

Related Link: Ordering Groceries Online Could Be A $100 Billion Industry In Less Than 10 Years

Flattish Earnings Seen For 2017

The firm estimates flattish earnings growth for 2017, with growth improving to 8–11 percent in 2018. That said, the firm expects one more negative revision, given the deflationary and competitive challenges coupled with continued investments from the company's management.

Accordingly, the firm expects the next few earnings reports to remain soft. Specifically, the firm estimates a 0.5 percent drop in comps in the fourth quarter. However, the firm expects a stronger comp trajectory later in 2017 or early 2018, helped by a return to inflation and a greater traction in areas such as Click & Collect, private label, natural/organic and fresh.

Pluses And Minuses

Oppenheimer said it is encouraged by signs of a bottom in food deflationary pressures and by more subdued expectations. On the flip side, the firm expressed concerns over the growth of new e-commerce players nationally, essentially overnight. Additionally, challenging center-of-store trends complicate the magnitude of a comp rebound, the firm added.

Buy On Weakness

Oppenheimer said it maintains its playbook of buying on weakness as a range-bound trade persists for now. The firm also adjusted its earnings per share estimate for the fourth quarter and the full year.

Oppenheimer has an Outperform rating on the shares of Kroger, while it has a 12–18-month price target of $38, up from $36 previously.