Shares of Kroger (NYSE:KR) have been struggling over the longer term, but have seen a boost over the past few weeks. Coming off a late-May low of $22.44, we’ve seen a quick 10% rally in Kroger stock.
There are a number of concerns tied to Kroger at this point, most of which all point to growth. Essentially, there are concerns about whether the company keep up with not only ecommerce pressures like Amazon (NASDAQ:AMZN), but also bricks-and-mortar competition like Walmart (NYSE:WMT), Costco Wholesale (NASDAQ:COST), Target (NYSE:TGT) and again, apparently Amazon in the future.
Further, with inflation remaining stubbornly low, Kroger loses pricing power, which stifles revenue growth. The grocery game is a tough business, despite everyone needing to eat. That said, maybe Kroger can get its growth from somewhere new: Cannabis.
Kroger Stock and CBD Products
When you can’t find growth from traditional outlets, it’s time to find new ways to generate sales. That becomes even more important when it involves products that consumers are interested in.
As a result, Kroger will reportedly start selling CBD products in its stores. Keep in mind, Kroger is no small operator. The country’s largest grocery chain now plans to sell CBD lotions and balms in its 945 stores across 17 U.S. states.
The company joins CVS Health (NYSE:CVS) as retailers begin to embrace CBD and cannabis products. That’s interesting for CVS, given that the company stopped selling cigarettes a few years back.
In any regard, CVS, Kroger and other retailers are seeing that there are health and pain-management benefits to these types of products. Management is also recognizing that demand and discussion around these products from their customers are heating up, and therefore it makes sense to carry them in the stores.
While there are still regulatory concerns about CBD products as cannabis is not legal at the federal level it’s clear that we’re moving toward a more welcoming environment. Should that trend continue, more retailers like Kroger and CVS will likely embrace the products too.
It’s also more likely that big consumer brands will partner with cannabis players like Canopy Growth (NYSE:CGC), New Age Beverages (NASDAQ:NBEV), Cronos Group (NYSE:CRON), etc. to create and market new products together.
That may be another boost for Kroger stock down the line.
Trading Kroger Stock
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The question ultimately boils down to whether selling CBD products will help KR stock. The answer in the short term is, probably not. At least from a fundamental perspective.
If Kroger were to perform a quick rollout to all of its 900+ stores, it’s possible we would see a flood of demand. But until it becomes more than just lotions and balms, the effect will likely be limited on its top and bottom line.
That’s not so much due to a lack of demand from consumers, but more because KR is already forecast to generate $123 billion in sales this year.
Estimates call for a 1.6% revenue boost in 2019 and a 2.7% increase in 2020 to $126.4 billion. Perhaps that 2020 number can inch higher if Kroger really kicks CBD sales into high gear.
As for the charts, KR stock is trying with all its might to stay above the 50-day moving average and the 10-week moving average near $24.50. If it can, perhaps Kroger stock can make a push north of $25 and potentially send it back to the Q2 highs near $26. Just above is the 61.8% one-year retracement at $26.19.
This $26 to $27 area has been significant for a number of years, as the chart above shows. While Kroger stock would still face an uphill challenge, clearing this level would be an important hurdle for the bulls.
On the downside, losing the 20-week moving average likely puts $24 back on the table. If this level fails to buoy KR stock, then a retest of $22.50 and channel support is on the table.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN.
