Last quarter, Kroger (NYSE:KR) sent many bearish speculators running when it posted impressive earnings results. KR stock is now trading near 52-week highs as a result. The company will once again enter the earnings limelight this week, on Thursday. The question for Kroger traders now is, can KR stock extend its gains?
Kroger is a latecomer to the earnings confessional, with competitors Walmart (NYSE:WMT) and Target (NYSE:TGT) already reporting. Both Walmart and Target posted solid quarterly results, showing better-than-expected year-over-year comparable sales growth.
In fact, Target said that it saw its best comparable-store sales growth in a decade, while Walmart said that sales growth rose 4.5% this past quarter. Both competitors said that sales were boosted by a strengthening economy and a positive tax situation for consumers.
The attention now turns to Kroger’s Thursday earnings report. The company is expected to post a profit of 37-cents-per-share on revenue of $27.97 billion. Sentiment is positive on this front, with EarningsWhispers.com putting the whisper number at 40-cents-per-share.
However, the real meat of Thursday’s report will come with guidance. Currently, Kroger is targeting full-year sales growth of between 2% and 2.5%. So far, Walmart lifted its 2018 forecast to 3% from 2% this quarter, and Target is aiming for a 5% jump. It stands to reason that Kroger should offer an equally impressive boost to full-year guidance this Thursday.
Technically speaking, KR stock has ridden high on growing bullish sentiment in the grocery market. The shares recently topped resistance at $32, the site of the stock’s late-August rejection. This region could now act as support heading into next week’s quarterly report. That said, KR stock is trading quite close to overbought territory. In other words, the shares are likely to consolidate into the $32 region ahead of earnings.
This would be a positive development for KR stock traders, giving the shares more room to run following Thursday’s report.
On the options front, KR still has many unconvinced bears lingering in the October series. Currently, the October put/call open interest ratio comes in at 1.15, with puts a clear favorite.
Given the choppy nature of the markets this year, some of this pessimism is understandable. However, it also indicates a wealth of potential sideline money that could boost the shares if Kroger follows suit with Walmart and Target and boosts full-year expectations.
Two Trades for KR Stock
Call Spread: KR stock has momentum on its side right now. And it will keep that momentum as long as there are no surprises in this week’s quarterly report. What’s more, it could gain momentum if the company boosts its full-year outlook … and there is a very good possibility of this, given Walmart and Target’s performances.
Traders looking to take advantage of this upside might want to consider an Oct $33/$34 bull call spread. At last check, this spread was offered at 31 cents, or $31-per-pair-of-contracts. Breakeven lies at $33.31, while a maximum profit of 69 cents, or $69-per-pair-of-contracts — a potential return of 122% — is possible if KR stock closes at or above $34 when October options expire.
Puts Sell: For a more neutral play on KR stock ahead of earnings, traders might want to take advantage of technical support in the $30 region. As such, an Oct $29 put sell position is an excellent option.
At last check, this put was bid at 32 cents, or $32-per-contract. If Kroger stock trades above $30 through October expiration, traders entering this position will retain the premium received for opening the position. However, if stock in Kroger trades below $30 ahead of expiration, then traders may be assigned 100 shares at a price of $30-per-share for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
