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Is Kroger Stock a ‘Buy’ after Its Upbeat Q1 Results?

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Kroger (NYSE:KR) announced better-than-expected results for the first quarter of fiscal 2020 on Thursday. Stockpiling since the end of February amid the COVID-19 outbreak helped drive the company’s sales growth. Despite the stellar results, Kroger stock fell 3.0% on Thursday. Investors might have expected a strong guidance update from the company. Kroger said that it expects to exceed its previously issued forecast for fiscal 2020. However, the company didn’t provide any specific metrics. Uncertainties due to COVID-19 make it difficult to predict how the pandemic will impact the business.

Earlier, Kroger predicted identical sales or comparable sales (excluding fuel) growth of over 2.5% in fiscal 2020. The company also expected an adjusted EPS of $2.30–$2.40.

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Kroger’s sales surged in Q1

Kroger’s sales grew 11.5% YoY (year-over-year) to $41.5 billion in the first quarter, which ended on May 23. Analysts expected sales of $40.7 billion. Excluding fuel and dispositions, the sales increased by 19.1% YoY. Identical sales or comparable sales (excluding fuel) grew 19.0% YoY. Notably, Kroger experienced higher demand for paper products, cleaning products, and non-perishable items in the initial stock-up phase of the pandemic. A spike in demand for essentials due to the pandemic helped drive higher sales for Walmart (NYSE:WMT) too. Walmart’s first-quarter revenue grew 8.6% YoY to $134.6 billion.

Meanwhile, Kroger’s first-quarter digital sales increased 92% and contributed over 3% to the comparable sales (without fuel). Social distancing and stay-at-home restrictions helped boost digital sales.

The company’s first-quarter adjusted EPS grew 69.4% YoY to $1.22. The amount was way ahead of analysts’ EPS estimate of $1.09. The first-quarter operating profit increased by 47.2% YoY to $1.33 billion. The reported gross margin improved to 24.3% in the first quarter of fiscal 2020 compared to 22.2% in the first quarter of fiscal 2019. The company’s operating margin improved by about 80 basis points to 3.2%. Meanwhile, the margins improved due to expense leverage on strong sales.

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Will the growth sustain

Following the first-quarter results, Deutsche Bank increased its target price for Kroger stock to $35 from $33. Citigroup raised its target price to $34 from $32, while Jefferies increased its target price by $1 to $33.

Kroger will likely continue to enjoy strong demand. However, the growth rate might not be as strong as the first quarter. The stockpiling trend has come down. Also, investments in the workforce, customer safety, and expenses to support higher digital sales will likely impact the bottom line.

Meanwhile, Kroger continues to invest in its e-commerce capabilities to compete with strong players like Amazon and Walmart. The company has over 2,000 pickup locations and 2,400 delivery locations. Such a wide network helps the company reach 97% of its customers. Also, Kroger’s partnership with Ocado to build automated fulfillment centers helps support growing digital sales efficiently. According to Kroger, digital sales continue to be strong and increased by triple digits in the first three weeks.

The company’s private brands help improve its sales. Kroger’s Simple Truth plant-based line grew 32% in the first quarter. So far, Kroger stock has risen 9.7% this year. Now, analysts expect about an 11% upside in the stock.

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