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Kroger’s Disappointing Earnings Missed Analysts’ Estimates

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Today, Kroger (KR) released weaker-than-expected third-quarter earnings.

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Kroger’s Q3 earnings

As we expected, Kroger’s earnings growth decelerated sequentially. The adjusted EPS fell on a YoY (year-over-year) basis and didn’t meet analysts’ expectations.

Kroger’s top line continued to gain from the launch of its privately-owned brands. The top line has witnessed healthy growth. Expanded pickup and delivery locations also supported the company’s sales growth.

Notably, Kroger’s identical sales growth accelerated sequentially. Despite benefiting from higher identical sales, Kroger’s top line was below Wall Street’s expectations.

Breaking down Kroger’s earnings

Kroger posted revenues of $27.97 billion—up about 1% on a YoY basis. However, the revenues fell short of analysts’ estimate of $28.18 billion. Kroger’s identical sales without fuel rose 2.5%, which was higher than its target of 2.0%–2.25%. Also, the comps growth rate accelerated sequentially. In the second quarter, Kroger’s comps rose 2.2%.

The company launched 231 self-owned brands in the third quarter. The launches include its fresh meatless brand Simple-Truth-Plant-Based. Kroger launched 203 brands in the second quarter and 219 self-owned brands in the first quarter. The company expanded its pickup and delivery services to 1,915 and 2,326 locations, respectively, in the third quarter. The sales growth in the company’s self-owned brands increased 3.4%.

While Kroger’s comps growth was impressive, it lagged Target (TGT) and Walmart (WMT). In the third quarter, Target’s comps rose 4.5%, while Walmart’s US comps rose 3.2%.

Kroger’s margins remained pressured, which reflected challenges in the pharmacy segment. However, productivity and cost savings continue to support the margins. The company’s FIFO gross margins fell by 24 basis points.

Kroger posted an adjusted EPS of $0.47, which fell short of analysts’ estimate of $0.49. The earnings fell about 2% YoY.

What’s the outlook?

Kroger stock was trading lower this morning following lower-than-expected third-quarter results. So far, the stock is lagging its peers by a significant margin this year. The stock is trading roughly flat on a year-to-date basis. In comparison, Target, Walmart, and Costco (COST) stocks have risen 88.4%, 27.4%, and 45.6%, respectively.

We think that Target, Walmart, and Costco are positioned the best in the grocery space. Their growth rates will likely outperform Kroger. Digital expansion and value pricing will likely drive these retailers’ traffic.

Kroger reiterated its fiscal 2019 guidance. The company expects comps growth of 2.0%–2.25%. Kroger expects its adjusted EPS to increase 2%–7% to $2.15–$2.25.

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