With just five S&P 500 (SPX) companies set to report next week, it’s rather slim picking for earnings traders. But we’re taking a swipe at one of our local grocers, Kroger (KR), which is based in our hometown of Cincinnati.
Hey, we love Kroger. It’s part of the community around these parts. But as they say, it’s nothing personal; it’s just business (or, in this case, trading).
Here’s the thing: Kroger used to be toward the top of the grocery chain. Not in Whole Foods (WFMI) or Trader Joe’s territory, but higher up than discounters such as Wal-Mart (WMT), Costco (COST) and Target (TGT).
Kroger used to be a bit pricey, but that’s not true anymore. Kroger has come down to the level of Wal-Mart and Costco because it had no choice. With the economy being what it is, consumers have traded down. And the Krogers of the world that don’t cater to the Whole Foods crowd have had to adjust with lower pricing and more sales. It’s a tough business.
Look at the numbers. Kroger’s revenue growth is flat, while its margins trail Wal-Mart’s. The profit margin is a razor-thin 0.22%.
Will Kroger eventually find its way out of discount purgatory?
Perhaps, but it probably won’t happen as long as questions remain about the consumer. Given recent data in confidence, spending, home pricing and unemployment, those questions aren’t going away. In fact, Wednesday morning, rival Safeway (SWY) offered up a conservative 2010 outlook that fell short of expectations. Plus, Costco and BJ’s Wholesale Club (BJ) missed profit estimates.
Like we said earlier, it’s a tough business.
Kroger reports Tuesday, March 9, before the open, and analysts expect 33 cents per share, a 38% decline from a year ago. But the company has missed estimates the past two quarters — by a lot. And the stock has been punished, dropping 11.9% and 7.5% on just the first day of the reports.
Given this history, and the state of the grocery business as seen in rival reports, KR has some work to do in its earnings and outlook to escape the fate of its competitors.
Sentiment is also working against the stock. The put/call ratio is low, indicating a market preference for calls. Analysts generally favor the shares, as just 1 of 15 rates the stock a “sell” compared to 10 “buys.” And short interest is tame. That’s a fairly optimistic backdrop heading into earnings — and that makes Kroger vulnerable.
On the chart, the stock doesn’t look too bad. The shares have been heading steadily higher since gapping lower following the last earnings report. But we’re seeing some resistance in the $22.50 area, which just happens to be the peak call open interest strike in the March and April series. All those call options represent a point of potential resistance.
Bottom line: Kroger looks vulnerable given the current state of the grocery business, which is racked with discounting, a tepid consumer and fierce competition. The company needs to impress with its earnings and outlook, but the odds are against it. KR looks like a put option play to us.
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