The Kroger Co’s Stock Drops Despite Better-Than-Expected Earnings as Investors Are Concerned About Lower Profits, Major Challenges

The major US stock indices declined last week amid investors’ concerns over the economic impacts from Hurricane Harvey, as well as Hurricane Irma that had been approaching Florida and hit it on Sunday after having destroyed the Caribbean region. On the back of these concerns as well as North Korea-related tension and ECB’s hints that it might start reducing its QE program, the US dollar hit a 32-month low. In this way, the S&P 500 lost 0.61% during the Labor Day-shortened week, while the Dow Jones Industrial Average fell by 0.86%.


Among the stocks that registered declines last week, were banking stocks, such as Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C), which lost 5% and 3.5%, respectively, amid the drop of the 10-year treasury yield falling below the critical 2.1% and hitting a new post-election low of 2.04%. General Electric Company (NYSE:GE), the oldest Dow Component, slid by over 5% after JP Morgan reiterated its ‘Underweight’ rating and $22 price target on the stock on Thursday, saying that the company’s earnings continue to decline. Walt Disney Co (NYSE:DIS), another company in the Dow Jones Index, has lost over 4% on Thursday, after CEO Bob Iger said the company would report profits in-line with last year. Disney led the fall of other media stocks.


According to TrackStar, the official newsletter of Investing Channel’s Intuition, financial advisors kept an eye on the aforementioned stocks and a bunch of others, including AT&T, Inc. (NYSE:T), which ranked on the first spot in the list of the 20 most searched tickers. Other stocks that made the list were Apple Inc. (NASDAQ:AAPL), which was the third most-searched ticker, Gilead Sciences, Inc. (NASDAQ:GILD), Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN) also made it to the top 10.


Another company that ranked as the fifth most-searched ticker last week was The Kroger Co (NYSE:KR). The supermarket chain was featured in the list for the first time in several weeks on the back of its fiscal second-quarter results. The Kroger Co (NYSE:KR) posted EPS of $0.40, which topped the consensus estimate by $0.01, while its revenue appreciated by 3.9% on the year to $27.60 billion and was higher than the expected $27.48 billion. However, despite better-than-expected top and bottom line, Kroger’s stock lost over 7% on Friday after the company released its second-quarter report. Investors were disappointed to see The Kroger Co (NYSE:KR) profit of $353 million decline by 8% on the year.


Another upside in The Kroger Co (NYSE:KR)’s financial report was a 0.7% increase in same-store sales in the second quarter. The metric beat expectations and reversed the declines registered in the previous two quarters on the back of declines in food prices, such as staple items like eggs and milk. The company’s management pointed out that in the second quarter, food prices rose for the first time since 2015. However, it’s unlikely that the increase in prices will help offset the price competition. US supermarket operations are facing tougher competition from European discounters, which have set an aggressive strategy to conquer market share in the US. In June, German discount grocery chain said that it would open 900 new stores in the US in the next five years, while Lidl, another German discounter opened its first stores this summer and plans to reach 100 stores by next year. The Kroger Co (NYSE:KR) currently has 2,796 retail food stores.


The increased competition from European supermarket chains led to other US retailers boosting their efforts to lower prices. Wal-Mart Stores, Inc. (NYSE:WMT) has also started investing billions of dollars to offer cheaper products. Moreover, Whole Foods, which has recently been acquired by Amazon.com, Inc. (NASDAQ:AMZN), has got access to an inflow of capital under the ownership of the eCommerce giant. Amazon started slashing prices at Whole Foods, an upscale supermarket chain, on the first day of the acquisition, offering organic products at discounts of as much as 43%. Such an aggressive approach to prices showed competitors that Amazon is willing to spend money in order to dominate the grocery retail industry, so other retailers, including The Kroger Co (NYSE:KR) are expected to come up with new pricing strategies.


Amazon-owned Whole Foods is one of the biggest threats for The Kroger Co (NYSE:KR). According to a note published by Barclays in March, 47% of Kroger’s stores are located within a three-mile range of a Whole Foods supermarket. Before Whole Foods was acquired by Amazon, it was losing customers, as Kroger had invested a lot of money to build its own offering of organic products, which reached $16 billion in sales in 2016. Since Amazon announced that it would buy Whole Foods, The Kroger Co (NYSE:KR)’s stock lost over 28%, being hit the hardest among grocery retailers.


Overall, The Kroger Co (NYSE:KR) is facing two major challenges, aside from lower prices. One is from European discounters, which already managed to disrupt several grocery retail markets across the pond (take the UK, for example). It is currently well-positioned to withstand this “disruptive” force due to its high number of stores, but this can change in the future. Another challenge is eCommerce, but here too The Kroger Co (NYSE:KR) can benefit from its vast chain of supermarkets and it reported a 126% increase in digital sales in the second quarter.


The Kroger Co (NYSE:KR)’s stock is currently trading at 10.7 times forward earnings, which makes it cheaper compared to other supermarket chains, but it all comes down to how the company will “survive” the price war and this uncertainty is probably the main reason why the stock is trading at a discount to its peers.

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