Kroger (KR) is in the sweet spot.
What’s a sweet spot? It’s the exact opposite of a perfect storm. Everything is moving in the retailer’s favor at it prepares to release its fiscal Q1 earnings on Thursday morning.
So far, 2015 has been a great year for KR stock. Kroger is up 12.8% for the year and 53.2% in the last 12 months, far outperforming the Dow Jones Industrial Average, which is down slightly so far this year and up only 5.8% in the last 12 months.
And the Street is still bullish on KR stock. Two days ahead of Kroger’s earnings release, Oppenheimer & Co. analyst Rupesh Parikh has raised earnings expectations for the quarter from $1.19 to $1.21 per share, which is the top of Kroger management’s guidance.
Parikh also increased his Q2 estimate from 77 cents per share to 79 per share, and his Q3 estimate from 74 cents per share to 77 cents. His estimate for FY2015 is $3.80 to $3.87 per share, and his estimate for 2016 is $4.20 to $4.25 per share.
That’s pretty bullish for an analyst. And we don’t even have to take his word for it since we’ve been bullish on KR for quite a while.
A Better Economy Helps KR Stock
The economy is slowly gaining steam. But not so much or so fast that most consumers can afford to be extravagant on basic purchases. That’s perfect for KR’s 2,600 grocery stores, since it is known for its value pricing.
And that is going to make a big difference as a number of big-service corporations are beginning to raise wages for their employees. One of the first places that money will be spent is on food and personal items — steak instead of hamburger once in a while, more entertaining, and trips to the lake with the family for a long weekend.
And its recent acquisition of Harris Teeter allows it to grow in the premium grocery market sector where middle-class shoppers turn to for organics, ready-to-cook-and-eat meals and house brands. Busy status-oriented upwardly professionals create a great value chain for KR brands.
KR will also benefit from rising energy prices. Kroger has 1,300 fuel centers and higher prices can certainly translate into higher margins and sales.
When prices start to rise and money continues to be hard-earned, consumers are more likely to start shopping for the best deals. It also doesn’t hurt that their fuel centers are usually anchored to a shopping center that houses a Kroger supermarket, where they can often get fuel at a discount.
What to Expect from KR Stock
The only challenge we see at this point for Thursday’s earnings announcement is KR stock’s big gains in the past year. Again, this is fundamentally a grocery store chain and a 53% rally in the stock in the past year is pretty significant.
Long term, KR is certainly a great pick, but the expectations it’s now living under are its biggest risk. If it can continue to hit — or exceed — its upgraded numbers, it will really make this stock even more interesting that it already is.
But if it misses the numbers, it will lose momentum quickly and without much bullish fundamental support, the stock could see a tough quarter, at least.
However, given the fact that the economy has worked in its favor over the quarter and KR has been growing beyond its expectations, the company’s risk isn’t as significant as its opportunities.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
