Kroger Co (KR) Same-Store Winning Streak Ends, KR Stock Falls

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Whether a company rises or falls after earnings has a lot to do with what people thought of it going into earnings. In the case of Kroger Co (NYSE:KR), people didn’t think much. Investors were hoping for earnings of 54 cents per share and revenue of $27.34 billion.

Kroger KR stock

The pessimists knew something. Technically, the company beat top-line estimates with revenue of $27.6 billion, and just about matched bottom-line estimates with earnings of 53 cents per share, or $506 million.

But, KR stock fell anyway, hard. It closed trading on Mar. 2 at $30.67, down 4.34%, because same-store sales (from units open more than a year) fell 0.7%. Total profit was also down 9% from $556 million, or 57 cents per share, in 2015.

The company’s guidance for 2017 earnings was $2.21-$2.25 per share, meaning management expects to keep the current pace of earnings.

Here is why that didn’t satisfy the critics.

Kroger Is Losing the Race

As with J C Penney Company Inc (NYSE:JCP), Macy’s Inc (NYSE:M) and Kohl’s Corporation (NYSE:KSS), Kroger is suffering from a hollowing-out of retailing’s middle class. All of these companies now have market caps that represent less than 40% of revenues.

As I wrote early this week, Kroger has more weapons to fight this hollowing-out than other companies. It has been deploying capital specifically to fight this, but KR’s main grocery business is so large that it is being sucked in anyway.

Last year, for instance, Kroger bought Modern HC Holdings, Inc., which operates a specialty pharmacy called ModernHEALTH, combining it with its Axium Pharmacy Holdings, bought in 2012. The goal has been to create an operation that can go toe-to-toe with outfits such as CVS Health Corp (NYSE:CVS) and Walgreens Boots Alliance Inc (NASDAQ:WBA).

Kroger also bought the parent of Mariano’s in Chicago, and more recently signed an agreement to gobble up Murray’s Cheeses, a specialty cheese chain based in lower Manhattan..

These are all high margin businesses. The trouble is that, as fast as these companies are growing, a small cut in same-store sales for the main Kroger chains keeps KR stock in its slough of despond.

What the pessimists don’t account for, though, is some of the other work Kroger is doing to maintain margins.

Cost Cutting Continues

A master agreement with McLane Co., a unit of Berkshire Hathaway Inc. (NYSE:BRK.A), to stock most of its convenience stores will help on the cost side. So, also, should its own vertical integration — the company operates 40 food processing plants around the country, producing baked goods, canned goods and dairy products. Lower costs should translate into profitability.

But, Kroger still depends on middle-class customers who no longer trust mainstream stores. Upper-middle-class customers are choosing to make bulk purchases at places like Costco Wholesale Corporation (NASDAQ:COST), or are just letting their fingers do the walking at Amazon.com Inc. (NASDAQ:AMZN). Lower-middle-class customers are flocking to dollar stores like Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) to save a few dollars. All these stocks do much better, on a price-to-sales basis, than Kroger stock.

Remember, too, that KR isn’t just Kroger. Ralph’s in California, Fred Meyer in Portland, Dillon’s in Kansas, Roundy’s in Milwaukee and Harris Teeter in North Carolina are all owned by Kroger, and are being squeezed.

Bottom Line on KR Stock

The result is that the market cap afforded mainstream retailers as a percentage of sales continues to decline.

Some are hanging in, like Costco, which has $75 billion in market cap supporting $118 billion in sales. CVS has $83 billion in market cap supporting $177 billion in sales. Wal-Mart Stores Inc (NYSE:WMT), however, has $216 billion in market cap against 2016 sales of $485 billion.

This is becoming the new normal. Kroger’s $27 billion of market cap on $115 billion in sales volume sounds ridiculous, but it will remain this way until the top line at its high-end chains becomes a bigger part of the whole, or until retailing fashions change.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in KR, CVS and AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/kroger-co-same-store-winning-streak-ends-kr-stock-falls/.

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