Kroger Co (NYSE:KR) has not had a good month. It posted first-quarter earnings in mid-June that were in line with expectations, with revenue up more than expected. But the real bombshell for KR stock came in the form of decreased guidance.
What you need to remember when going into an earnings announcement is Wall Street is rarely happy with hitting the numbers the analysts have projected. Traders always want more.
What’s worse than meeting expectations, however, is lowering future expectations. Remember, Kroger is an industry bellwether. If it announces bad news, it sends a chilling effect through the entire industry.
Kroger announced that it was lowering guidance as it made it pricing more competitive, which may affect margins for the next quarter or two. The only grocer bigger than KR is Wal-Mart Stores Inc (NYSE:WMT). Last year, according to Statista, KR had a 9% market share in the U.S. compared to Walmart’s 17%.
Remember, KR is a grocery-store chain, so consumers go there to buy groceries. Walmart, however, generates only half its revenue from its grocery departments, so it draws shoppers in who may have gone to the store for a Crock-Pot or a shirt and decided to pick up dinner while they were there.
They’re two different models. And KR knows it and it’s making the crucial long-term adjustments necessary to continue to grow market share. Then the big shocker came when Amazon.com Inc (NASDAQ:AMZN) announced it was buying Whole Foods Market Inc (NYSE:WFM).
There’s no doubt this is a watershed event in the sector and likely will start a chain of acquisitions. You see, grocery stores are low-margin businesses with products that have significantly limited shelf life. If you’re big enough and can manage inventory well, you can be successful.
It’s likely Amazon will come in and build its amazing warehouse efficiencies into the WFM stores and warehouses. And then AMZN can use those distribution channels for other products it sells, as well as delivery hubs.
What This Means for KR Stock
Amazon has been talking about buying brick-and-mortar stores for a while, and now it has happened. But the fact is, WFM has about 1.7% market share, more than four times less than KR. And its market penetration is also significantly less than Kroger’s. Also, Kroger is making great strides in its online shopping, pickup and delivery services.
It smartly used its acquisition of Harris Teeter as testing ground for these services and will likely roll out its operation to Kroger stores in the near future. This is the type of smart prototyping that Amazon CEO Jeff Bezos gets a lot of credit for, but Kroger is no slouch in this department.
KR stock is down 22% in the past month, solely due to these two announcements. If you’re an investor — as opposed to a trader — then this is a great time to pick up KR for a significant discount.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
