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Kroger Stock Downgraded, Lags Walmart and Target

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  • Jefferies downgraded Kroger stock to “hold” and reduced the target price.
  • Kroger continues to underperform Walmart and Target.

On Thursday, Jefferies downgraded Kroger (KR) stock to “hold” from “buy” and lowered the target price to $26 from $29. Analyst Christopher Mandeville criticized Kroger’s strategy to invest in centralized fulfillment centers.

The analyst said, “We’re checking out as confidence in Kroger’s long-term grocery strategy and management’s ability to effectively communicate wanes,” according to a report from the Cinncinati Business Courier. Following the downgrade, Kroger stock closed 2.8% lower at $23.84.

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Kroger, in partnership with Ocado, plans to construct 20 automated customer fulfillment centers to step up its online offerings. In September, the company announced its fifth fulfillment facility in Dallas, Texas. These high-tech fulfillment facilities require high upfront investments. We’ll have to see whether the centers reduce the last-mile shipping cost.

In contrast, Target (TGT) and Walmart (WMT) are leveraging their store base to lower shipment costs. Target is moving its digital fulfillment from distribution centers to stores, which lowers the costs significantly. During the first-quarter conference call, Brian C. Cornell, Target’s CEO, stated that the move resulted in a 40% reduction in costs. Meanwhile, Walmart is also investing in stores to use them as fulfillment hubs and reduce last-mile shipping costs and time.

Kroger stock lags both Walmart and Target

Kroger’s digital initiatives, including its expanding pickup and delivery services, are driving its e-commerce sales. During the last reported quarter, Kroger’s e-commerce sales increased 31%. The company’s transformational plan, including efforts to cut costs, invest in technology, and drive efficiency, helps it stay afloat.

However, the transformational plan isn’t helping Kroger in a big way. For instance, Kroger’s pickup and delivery services, combined with its privately-owned brands, are supporting its sales and margins. Kroger continues to lag Walmart (WMT) and Target (TGT).

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Notably, Kroger’s comps met management’s expectations during the last reported quarter. However, Kroger didn’t match Target and Walmart. The company’s comps increased 2.2% (ex-fuel) during the second quarter. The comps were well within management’s target range of 2.0%–2.25%. However, Kroger’s comps growth lagged Target and Walmart. Target’s second-quarter comps rose 3.4%, while Walmart’s second-quarter comps rose 2.8%.

In the near term, Target’s comps growth will likely increase 3.4%. Walmart expects 2.5%–3.0% growth in its US comps. Both of these projections are higher than Kroger’s target range.

Kroger’s underperformance dragged its stock down. The stock has fallen 13.3% on a year-to-date basis as of Thursday. In comparison, Target stock has risen 67.3%, while Walmart stock has risen 28.4%.

Analysts prefer Walmart and Target  

Among the 25 analysts covering Kroger stock, 13 recommend a “hold,” ten recommend a “buy,” and two recommend a “sell.” Analysts’ consensus target price of $27 indicates an upside of about 10% based on its closing price of $24.53 on Wednesday.

While most of the analysts are neutral on Kroger, analysts recommend a “buy” on Target and Walmart stock. Notably, 19 analysts recommend a “buy” on Walmart stock, while 12 recommend a “hold.” As for Target, 16 analysts recommend a “buy,” while ten recommend a “hold.”

Read Target and Walmart: Is It Time to Exit the Stock? to learn more.

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