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KR’s Earnings Likely to Fall for the Second Time in Fiscal 2017

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Evaluating Kroger’s EPS growth in fiscal 2017

While Kroger (KR) successfully maintained strong top line growth during the first nine months of 2017, persistent deflation and rising competition started eating at its bottom line.

KR’s earnings per share (or EPS), which rose 12% in fiscal 1Q17, slowed to a rise of 6.8% in fiscal 2Q17 and fell 4.7% in fiscal 3Q17. Its average quarterly EPS rise was ~22% between fiscals 2015 and 2016.

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Fall in margins on rising price investments

Kroger’s gross margin deteriorated 14 basis points to 22.2% in fiscal 3Q17. The fall was primarily driven by investments in pricing made by the company to stay competitive. 

KR’s operating margin also fell 40 basis points to 2.7% due to a lower gross margin and a rise in its selling, general, and administrative expense rate. For fiscal 2017, the company expects its operating margin to contract further.

Kroger cuts its fiscal 2017 outlook yet again

As a result of ongoing challenges, Kroger has lowered its fiscal 2017 guidance twice during the year. During its fiscal 3Q17 conference call, the company lowered its EPS guidance to $2.10–$2.15, compared to the $2.10–$2.20 it had guided earlier and the $2.19–$2.28 it had guided at the beginning of the year.

For fiscal 4Q17, Kroger’s EPS are likely to fall 8.8% to $0.52, the second consecutive quarterly earnings fall for the company. Its EPS growth was positive for ten straight quarters prior to fiscal 3Q17.

For fiscal 2017, Wall Street’s forecasts are in line with KR’s management’s guidance. Analysts’ consensus is looking for a 2.3% year-over-year (or YoY) rise in EPS to $2.11.

Investors looking to invest in Kroger through ETFs can choose to invest in the VanEck Vectors Retail ETF (RTH). KR has a weight of ~4.1% in RTH.

How did Kroger’s competitors fare?

Two of Kroger’s close competitors, Walmart (WMT) and Whole Foods Market (WFM), also posted quarterly earnings falls when they reported their results this month.

Walmart reported a 12.8% fall in its EPS to $1.30, but it beat analysts’ estimates by $0.01. Whole Foods Market’s EPS were in line with estimates of $0.39, a fall of 15% YoY.

Read the next article to learn about Kroger’s stock market performance and dividend policy.

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