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Is Kroger Stock’s 11% Jump Yesterday Justified?

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  • Kroger stock closed 11% higher yesterday.
  • The company’s 2020 guidance update and new share repurchase plan boosted its stock.

Kroger (KR) stock closed more than 11% higher yesterday after the company gave better-than-expected 2020 sales and EPS guidance. Kroger expects its identical sales growth (excluding fuel) to increase by more than 2.25%. Analysts forecast just 2.0% growth.

Meanwhile, Kroger now projects 2020 adjusted EPS of $2.30–$2.40, higher than Wall Street’s expectation of $2.30. The company has also continued to boost shareholders’ returns through share buybacks and higher dividends, and has announced a new $1 billion share buyback plan. On June 27, Kroger hiked up its quarterly dividend by 14% to $0.64. Kroger has increased its quarterly dividend at a double-digit percentage rate for the last 13 years.

Will Kroger stock fizzle out?

With a forward PE multiple of 12.2x, Kroger stock trades at a very low valuation compared with peers. Its peer group, including Walmart (WMT) and Target (TGT), has an average multiple of 16.7x. These multiples seem justified based on Target’s and Walmart’s better growth and Kroger’s structural challenges.

Kroger’s transformational plan seems to be working, though slowly. The company’s digital transformation, private label brand expansion, and cost-saving measures bode well for its future growth. However, we see Walmart and Target doing better. Kroger’s comps growth lags behind that of both peers, and Walmart and other deep discounters offer more attractive pricing for value-driven shoppers. Walmart and Target both boast large assortments, convenient shopping options, and broad customer reach.

On the e-commerce front, Kroger has expanded its reach through pickup and delivery services. Whereas we believe this expansion could continue to grow its e-commerce sales. Kroger has a lot of catching up to do, especially with Amazon (AMZN) as a competitor.

When it comes to free and fast delivery, matching Amazon can be an uphill task. Recently, Amazon offered even more convenience by making Amazon Fresh delivery free for Prime members. Previous, Prime members paid $14.99 per month for Amazon’s ultrafast grocery delivery.

Where is KR stock headed?

Kroger’s 2020 outlook is encouraging given its heightened competition. Along with its low valuation, its outlook could boost its stock. However, although the company’s transformational plan is working out well, we see Walmart and Target as better options in the retail and grocery space. Both companies’ comps and EPS growth have continued to outperform Kroger’s.

Wall Street’s average target price of $27.05 for KR implies a 2.8% downside based on its closing price yesterday. We expect analysts to now raise their target price for Kroger stock after the company’s guidance update. However, any upside could still be limited.

Including yesterday’s gain, Kroger stock is now up 1.2% year-to-date. In comparison, Walmart and Target are up 27.6% and 66.5%, respectively.

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