Kroger Stocks Gains on Evercore Rating Upgrade

Today, Evercore ISI upgraded its rating on Kroger (KR) stock to “outperform” from “in line.” As per CNBC, Evercore ISI doesn’t think the company’s stock reflects its improving same-store sales and its moderating investment spending. Meanwhile, Citigroup increased its price target on Kroger stock to $32 from $30. The stock rose 0.6% today following favorable analyst activity.

Kroger’s recent earnings failed to impress

Kroger reported its third-quarter earnings results on December 5. It missed analysts’ sales as well as earnings expectations. The company’s net sales grew 0.5% YoY (year-over-year) to $27.97 billion. Heightened rivalry from Amazon, Walmart (WMT), and Target (TGT) has been hurting Kroger’s sales. The company’s third-quarter adjusted EPS fell 2.1% to $0.47. Analysts expected revenue of $28.15 billion and adjusted EPS of $0.48.

However, identical sales excluding fuel grew 2.5% in the third quarter, marking an improvement from 2.2% growth in the second quarter. Despite this improvement, Kroger still lagged its major peers. Walmart’s third-quarter revenue rose 2.5% to $128 billion, while US same-store sales increased 3.2%. Target delivered impressive third-quarter metrics. Its revenue rose 4.7% YoY to $18.7 billion, and its same-store sales growth was 4.5%.

Gauging analysts’ sentiment

Kroger stock has risen 2.5% YTD (year-to-date). It significantly lags the 28.6% and 92.9% rises in Walmart and Target stocks, respectively. It’s also underperformed the 26.4% rise in the S&P 500. Of the 24 analysts covering the stock, 12 have “hold” recommendations, ten have “buys,” and two have “sells.”

Through its Restock Kroger program, the company is undertaking several initiatives to improve its performance. It’s been entering into strategic partnerships to revive its business and compete with Amazon. It’s also tied up with Microsoft to develop digital solutions that will help improve the customer shopping experience. The company has also partnered with British company Ocado to build automated warehouses that will help it efficiently fulfill customer orders.

To bring exclusivity to its stores, the company launched 231 Our Brands items. These private brand assortments include meat and dairy alternatives under the Simple-Truth-Plant-Based collection. On December 11, Kroger announced its collaboration with Walgreens Boots Alliance (WBA) under which the two companies will source merchandise together to lower costs. Kroger and Walgreens earlier partnered up to operate Kroger Express stores within some Walgreens locations. Walgreens is also selling select health and beauty products at some Kroger stores.

Despite its weak third-quarter performance, Kroger reaffirmed its guidance for fiscal 2019. It expects identical growth in the range of 2.0%–2.25%. It also expects fiscal 2019 adjusted EPS of $2.15–$2.25.

However, analysts are largely cautious about Kroger stock. Their 12-month average price target of $27.71 implies a potential downside of about 2.0%.