Kroger (NYSE:KR) stock has been a big pandemic winner.
Before the novel coronavirus hit, I pounded the table for this stock. The price to earnings ratio is 6.5, I argued then, the dividend yields 2.4%. No way a profitable national retailer should be selling at just one-sixth its revenue.
If you bought shares then, you have done very well. Kroger today is worth over $27 billion, the PE is at 13.4x, and the dividend now yields 2.07%. Kroger grocery stores were essential businesses during the lockdown.
But now investors are looking past the pandemic and they expect this company to perform.
That starts with beating estimates for this morning’s Kroger earnings report, 51 cents per share on $29.66 billion of revenue. It should also mean beating the “whisper number,” a hoped-for 56 cents of earnings.
Even a beat may be a sell signal.
Is KR Stock Overvalued?
Kroger shares are approaching the levels they reached in late 2015. Six months after a 2-1 stock split and a $500 million buyback authorization, the Cincinnati-based grocer was riding high.
Flash forward to early in 2019 and KR stock was fighting to hold $20. Analysts saw it as a muddle, with literally dozens of store brands across the country. Fred Meyer is Kroger. Ralph’s is Kroger. Harris Teeter is Kroger. When Kroger pulled stores from some of Harris Teeter’s North Carolina territory, reporters wrote that Kroger was abandoning the state.
Since then Kroger has created a unified brand — “Fresh for Everyone.” It has even begun putting Kroger signs on chains it has owned for more than 20 years. It sold its gas stations, always an awkward fit, for $2.15 billion.
Kroger also launched digital initiatives, including a mobile app, pick-up services, and a deal with the UK’s Ocado for automated delivery warehouses.
But while sales shot up during the lockdown, topping $41 billion, that may be a one-time deal. Kroger’s digital operations weren’t ready for the flood. Ocado’s warehouses looked sub-optimal next to Walmart’s (NYSE:WMT) delivery from stores.
While Kroger shares have outperformed those of Walmart in 2020, WMT stock is by far the better long-term play.
Where is the Love?
With the initial pandemic panic easing, even as the death toll rises, things are going back to normal at Kroger. Union workers are protesting the end of hazard pay. They say the company hasn’t protected them. Hiring a woman who was sleeping in a Kroger parking lot only emphasizes to those employees that management sees them as disposable.
Hedge funds have also been dropping Kroger over the summer and it’s easy to see why. Meeting the current earnings estimates will mean year-over-year sales growth of just 5.3%. Bottomline growth would be 13%, not much given the circumstances.
Many analysts will be digging inside the Kroger numbers today, looking for reasons to sell. While the stock could test those 2015 highs, it could also be subject to post-panic profit-taking.
The Bottom Line
Kroger insists it has some tricks up its sleeve. This morning’s 10 a.m. Eastern conference call could reveal them.
The Kroger Ship delivery service, for which the Ocado deal was signed, will soon expand through a marketplace including third-party goods. The market will be run by Mirakl, a French company.
To hear Kroger management tell it, they are cutting edge. But they’re still not one merchant. They’re dozens. This is more than a branding exercise. Kroger ceded territory to Harris Teeter because that unit is non-union.
If you think all this makes it hard for consumers to see Kroger the way they do Walmart, you’re not wrong. The company’s reinvention still has a long way to go. You can bet on that or, if you’ve been in KR stock during the pandemic, you can take profits.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, 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 no shares in companies mentioned in this story.
