The Kroger Co. (KR) will announce its quarterly earnings numbers tomorrow morning, ahead of Wall Street’s open. With shares at 52-week highs, Kroger will likely need an outstanding quarter with raised guidance to keep fresh 52-week peaks in play.
As you can see from the chart below, shares have rebounded nearly 20% from a mid-October low just north of $50. Additionally, Kroger shares have been in a strong uptrend since making a February low of $35.
The suit-and-ties have Kroger earning 61 cents per share on revenue of $24.8 billion for the third quarter. The low estimate out of the 19 analysts that cover KR stock has Kroger earning a profit of 59 cents per share, which would have headline risk a miss of 2 cents per share.
The high target has Kroger earning 66 cents per share along with a top estimate for revenue north of $25 billion, which would mean a beat of 5 cents per share and a gangbuster headline.
Kroger has surpassed Wall Street’s forecasts in the past three quarters by 1 cent per share, 4 cents per share and 6 cents per share. In the year-ago quarter, Kroger matched expectations.
KR shares tend to be volatile after earnings, and the near-term options are pricing in roughly a 4% move following the news.
The KR Dec $60 calls and the KR Dec $60 puts would create a straddle option play and would cost about $2.50 to enter a position in both.
The breakeven points would be $62.50 or $57.50 and would cover the cost of the trade if both KR options were purchased. The December options expire two weeks from this Friday. So, there is risk to the trade if shares don’t make a large move after earnings or if the stock stays in between these levels.
A 5% move in KR stock from current levels on Thursday or within two weeks would have shares pushing $63 or testing $57. This would make the aforementioned straddle trade a profitable one.
If KR shares moved 10% over the same time period, a run past $66 or a drop below $54 would get the calls or puts pushing $6, which would equate to a monster triple-digit return.
Kroger shares were flat for much of September following second-quarter earnings results and hovered around $52 during that time. Kroger stock jumped 4% from $47.27 to $49.84 when June’s numbers were released, but it failed to clear $50 by the end of the month. In March, Kroger tested $45.25 on the open but closed at $43.37 (down $0.31) following its earnings release.
Given the past three quarters, a move of 5% seems less likely unless Kroger beats Wall Street’s guidance or misses by a mile. On that note, the aforementioned straddle trade seems risky to buy, and it might make better sense to sell both options. This would create a “naked” position, and these types of strategies carry a different set of risk characteristics.
Bullish traders trying to play a directional move on the earnings announcement could use the December calls but will also have to worry about a “sell-the-news” event. Bearish traders have to worry about a massive beat with raised guidance and analysts upgrades.
Earnings trades can be tricky, but, by doing the homework, it makes it easier to define risk and reward and determine if it’s safer to swing the bat or sit in the dugout. I will likely pass on trading Kroger this time around, but there’s no denying the stock’s bullish trend.
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