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Kroger: Can We Expect a Solid Quarter this Time?

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Part 3
Kroger: Can We Expect a Solid Quarter this Time? PART 3 OF 5

Why Kroger’s Earnings Could Fall 17% in 2Q18

A look at Kroger’s bottom-line growth

Wall Street forecasts Kroger’s (KR) second-quarter earnings to fall 17% YoY (year-over-year). Diluted adjusted earnings per share are projected to land at 39 cents, compared to 47 cents in 2Q16. This would be the fourth consecutive quarter of earnings decline for Kroger.

Kroger has delivered some strong bottom-line numbers in the past. Its average EPS growth stood at ~19% between fiscal 2012 and fiscal 2016. However, deflationary pressures and price cuts by competitors, especially Walmart (WMT), started to impact sales comps and margins in fiscal 2017.

As you can see in the chart below, Kroger’s gross margin has deteriorated from 22.9% at the beginning of fiscal 2017 to 22.1% in the first quarter of 2018. Gross margin is likely to contract further to 21.6% in the second quarter.

Why Kroger’s Earnings Could Fall 17% in 2Q18

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What is Kroger doing to survive in the overly competitive grocery space?

Kroger has been investing heavily in price, technology, and acquisitions to stay competitive. While these investments have impacted near-term earnings growth, they would allow the company to protect itself from rising competition from Amazon (AMZN) as well as Walmart.

A look at fiscal 2017 guidance

Along with its first-quarter results, Kroger had lowered its full-year adjusted EPS guidance, citing “incremental investments in price” and “incremental investments in hours and wages.” The company expects full-year EPS in the $2.00–$2.05 range, compared to the $2.21–$2.25 guided earlier.

Investors looking to invest in Kroger through ETFs can choose to invest in the Van Eck Retail ETF (RTH). KR has a weight of approximately 3.4% in RTH.

Read on to see Kroger’s stock market performance and valuations.

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