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After 10 Strong Quarters, Kroger’s EPS Likely to Drop in 3Q17

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Nov. 30 2016, Updated 10:05 a.m. ET

Evaluating Kroger’s EPS growth in 2Q17

In 2Q17, Kroger (KR) reported a 6.8% YoY (year-over-year) growth in earnings per share (or EPS) to $0.47. This was two cents better than the Wall Street average earnings estimate, making it the 11th consecutive earnings beat for Kroger.

While earnings continued to grow, 2Q17 growth was the slowest growth in the last ten quarters. The company has recorded an average EPS growth of ~20% between 1Q15 and 1Q17. The company’s management cited persistent deflation as the key headwind for its earnings growth.

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Kroger lowered guidance on deflationary pressures

As a result of the second-quarter challenges, Kroger lowered its full-year earnings guidance to $2.10 to $2.20 per diluted share as compared to the previous forecast of $2.19 to $2.28. Deflationary headwinds and restructuring of employee pension obligation were cited as the key reasons behind the revised guidance.

Kroger’s 3Q17 EPS likely to decline

For the third quarter, Wall Street analysts have predicted a 4.7% YoY decline in Kroger’s EPS to $0.41. Earnings growth could turn negative for the first time after ten strong growth quarters. For the full fiscal 2016, Wall Street has predicted EPS growth of 3.4% to $2.13 per share, in line with the company’s revised guidance.

Investors looking for exposure to Dollar General through ETFs can consider the VanEck Retail RTF (RTH), which invests 4.3% of its total holdings in the company.

How did Kroger’s competitors fare in recent quarterly results?

As discussed in the previous section, Kroger’s competitors Walmart (WMT), Whole Foods Market (WFM), and Sprouts Farmers Market (SFM) reported that deflationary headwinds impacted their quarterly results.

Walmart’s earnings per share fell 1% for three months ending October 31, 2016. However, the company exceeded Wall Street expectations by two cents.

Sprouts reported an EPS decline of 24% to $0.16, missing the consensus by a cent. This was the first time that the company witnessed a decline in its earnings after it was listed in July 2013.

Whole Foods Market also reported an EPS decline of 6.7%. The company, however, beat the consensus by four cents.

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