Kroger Co. (ticker: KR), America’s largest pure-play grocery stock with nearly 2,800 stores across two dozen brands, will enter Thursday morning’s first-quarter earnings report grossly behind the eight ball.
KR stock is off 11 percent versus a market that’s up 9 percent — largely the product of a dreadful fiscal year 2016 fourth-quarter report in which Kroger shocked Wall Street with a decline in same-store sales. Worse, the problems are hardly Kroger’s alone. Grocers and big-box stores with food-retail operations are feeling the pain from sliding food prices.
However, despite an ugly environment for grocers and Kroger’s company-specific issues, KR could be set up for a recovery.
The headline numbers. Make no mistake — Kroger doesn’t need a “good” quarter to make a splash on Thursday. It just needs to hurdle a limbo-level bar set by Wall Street’s analysts. Revenues are expected to reach $37.75 billion — a mere 3.3 percent jump amid a full year where pros think Kroger is capable of 5 percent top-line growth. Meanwhile, profit estimates are for an 18 percent dip to 57 cents per share.
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And if you didn’t like Kroger’s last quarter — in which comps declined 0.7 percent — you probably won’t enjoy what’s coming down the pike. Kroger said in its guidance statement that while it expected improvement in the operating environment later this year, the first half of 2017 will “be similar to the second half of 2016.”
If there’s any solace — and long-side opportunity — to be had, it’s that Wall Street seemed to absorb all these realities back in March, when KR stock sold off by about 10 percent in the week following its fourth-quarter report.
A slightly rosier view toward Kroger might be warranted going forward.
The sunnier side of Kroger. The best argument for a Kroger surprise is that food deflation — which choked grocers across 2016 — appears to be easing. April’s CPI Detailed Report showed a 0.2 percent improvement in the food index, marking the fourth consecutive month that measurement headed higher.
While customers won’t appreciate those kinds of changes, upticks in food prices help bolster grocers’ top lines.
This change is already bolstering the fates of other companies with large grocery operations. Wal-Mart Stores ( WMT), for instance, posted improvement in food retail for its first quarter, which “delivered the strongest quarterly comparable sales performance in more than three years, due in part to a lack of market deflation in food,” CNBC reported.
BMO Capital Markets analyst Kelly Bania also is hopeful that lower food deflation will show up in Kroger’s first-quarter results. In a report out last week, she says the company revised its deflation forecast from 1.3 percent to 1 percent and sees the potential for improved comparable sales.
Wells Fargo was far more exuberant on Kroger in an early May note, saying that Kroger “remains our best idea in food retail.” At the time, Wells cited a cheap valuation thanks to worries about competition; KR stock traded at a forward price-earnings ratio just above 13, where shares still trade today.
Looking ahead, expansion, which is one of Kroger’s favorite weapons, is constantly in play, too. Back in 2013, Kroger bought Harris Teeter for $2.5 billion to add more than 200 stores mostly located in the South, and in 2015 it gobbled up Midwest-focused chain Roundy’s for $800 million. Most recently, Kroger bought longtime partner Murray’s Cheese, a specialty foods retailer based in Greenwich Village, New York — a small $20.6 million play announced in February.
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But analysts want more, suggesting Kroger could be a potential buyer for the remaining stores of Midwest chain Marsh, but a much bigger splash would be Whole Foods Market ( WFM), the struggling organic-centric grocer that Credit Suisse’s Edward J. Kelly says Kroger should buy at $40 to $45 per share.
In the near term, though, Wall Street increasingly looks optimistic about a Kroger recovery. Shares have already recovered to about $31 — 5 percent better than their May lows. But a significant beat Thursday could send KR stock back near the $33-$34 level it yielded after March’s report.
More Earnings in Focus
Bob Evans Farms (BOBE). Bob Evans hasn’t gotten the attention that Apple ( AAPL) and Alphabet ( GOOGL, GOOG) have, but it’s just as deserving. BOBE shares are up nearly 35 percent this year, outdoing several of Wall Street’s hottest tech stocks on optimism over the company’s new direction. Specifically, Bob Evans exited the restaurant business by selling its chain of 523 locations to private equity firm Golden Gate Capital back in January for $565 million. BOBE instead will focus on growing its prepared foods business, even doubling down by announcing the purchase of Pineland Farms Potato Co. on the same day it unveiled the Golden Gate deal. Bob Evans’ food division brought in $9.8 million in profits on $112 million in revenues last quarter, versus a $1.6 million loss for the restaurants business on roughly double the sales. This quarter’s fiscal fourth-quarter estimates, due out Thursday morning, are just as telling. Although the company’s revenues will plunge by almost 70 percent without restaurant contributions, earnings are expected to come in just 12.5 percent lower at 42 cents per share.
H&R Block (HRB). Here comes the big one. H&R Block’s fiscal fourth quarter covers the all-important three-month tax season from the start of February through the end of April, and as a result, this is where HRB makes its only profits of the year. For instance, in fiscal 2016’s fourth quarter, H&R Block brought in $3.13 per share in diluted earnings from continuing operations … to bring the full-year profit to just $1.53 per share. That’s why Wall Street actually cheered HRB’s 49-cent loss in the third quarter. For fiscal 2017, Wall Street isn’t expecting much on the growth side, with fourth-quarter revenues up 0.8 percent to $2.32 billion, capping off a fractional decline in sales for the year. But adjusted fourth-quarter earnings are expected to pop roughly 12 percent to $3.53 per share, pushing a 10 percent jump in full-year profits to $1.75.
This Week’s Earnings Calendar
Wednesday. Jabil ( JBL), Liberty Tax ( TAX)
[See: 9 of the Best-Loved Stocks of the Trump White House.]
Thursday. LightInTheBox Holding Co. Ltd. ( LITB), Yingli Green Energy Holding Co. Ltd. ( YGE)
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Kroger Co. (KR) Could Catch Fire This Week originally appeared on usnews.com
