Kroger Co (NYSE: KR) stock is up more than 12 percent in the past week after the company reported earnings that exceeded market expectations. However, analysts are skeptical that Kroger will be able to maintain its momentum, and some say long-term investors should take the opportunity to cash out of KR stock.
Kroger’s fiscal first-quarter numbers, particularly its gross margin of 21.8 percent, weren’t as bad as the market anticipated, but Pivotal Research analyst Ajay Jain says it will be difficult for Kroger to repeat its strong quarter. Gross margins declined 0.13 percent in the most recent quarter, and Jain says market share data suggests Kroger is on track for just 1.9 percent same-store sales growth in the second quarter.
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According to Jain, Kroger management has taken a number of positive steps to help fend off rising competition and pricing pressures in the grocery business. Jain says Kroger management has set its full-year guidance bar relatively low, leaving the door open for a guidance raise down the line. But with the stock up 29.7 percent in the past year, Jain says there is little upside remaining.
“Right now, the stock has simply gone up too far and too fast from a valuation perspective,” he says.
Kroger has already remodeled about 200 of 600 stored targeted for a makeover as part of its Re-Stock initiative, and Jain says the remodeling process adds a bit more uncertainty to the Kroger picture.
“While there is still potential for a more meaningful [fiscal 2018] guidance raise down the road, the risk of disruption from Kroger’s on-going store optimization process also needs to be taken into account,” Jain says.
CFRA analyst Joseph Agnese says there’s a lot for investors to like about Kroger’s quarter, but it doesn’t change the competitive headwinds the company is facing.
“Margins narrowed significantly less than we expected as price cuts and increased investments to improve services as well as increased wages were largely offset by improved cost control due to process changes,” Agnese says.
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He says maintaining margins may prove difficult in the long term.
“We are pleased by KR’s ability to mitigate pricing pressure with improved operational processes, but still believe margin risks are high as KR aims to price competitively in the future,” Agnese says.
Both Pivotal Research and CFRA have “hold” ratings and $31 price targets for KR stock.
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Kroger Co (KR) Stock May Run Out of Steam originally appeared on usnews.com
