- Kroger’s revenue and earnings per share (EPS) are expected to expand 6% and 10%, respectively, YoY.
- Expect management discourse on Kroger’s organic food initiatives.
- Expect analyst questions regarding the economy and competition.
Kroger (NYSE:KR) Q1 2016 earnings are expected to be announced on Thursday, June 16. Analysts expect the company to report earnings per share (EPS) of $0.69 on revenue of $34.85 billion, according to Yahoo! Finance. This would represent a 10% YoY increase in earnings and a 6% YoY increase in revenue. However, a three year run up in stock price (up until this year) along with macroeconomic and competitive pressures leaves some in the financial community wondering about any near-term price appreciation potential. With that said, let’s examine a few things that investors should expect when the management reports its earnings next week.
Organic food offense
Expect Kroger's management to discuss its organic and healthy food strategies. People increasingly consume food and beverages with the “organic” label as consumers perceive health benefits from the product line. Conventional wisdom holds that increasing health care costs, as well as the desire to live a long and healthy life, serve as catalysts for the shift in consumer spending patterns. This shift long benefited organic grocery pioneer and competitor to Kroger, Whole Foods Market (NSDQ:WFM).
On April 1, Kroger made an interesting partnership with privately held organic grocer Lucky’s Market. Even more interesting is the fact that Kroger invested in the chain. Kroger’s press release touted that its investment and scale will benefit Lucky’s Market. However, Kroger will most likely come away with an enhanced understanding of the organic food market. It shouldn’t come as a surprise if Kroger acquires Lucky’s Market outright, giving Kroger a further foothold in the organic grocery market.
Competition and economics
Look for analysts’ questions related to deflationary trends, especially with fuel. This could conceivably impact revenue more than expenses, causing a margin contraction. On June 7, analysts at Credit Suisse (NYSE:CS) cut the target price of Kroger’s stock by an eyebrow raising 6% to $34 per share. Moreover, this represents a 7% decrease from its current level as of this writing. The fact that Kroger continues to operate in an immensely competitive business weighs on the minds of analysts.
I believe Kroger is more than fully aware of the competitive dynamic of its business. This represents the reason why it continues to adopt new technologies that enable easier lives for the consumer. In addition, technology enables Kroger to stay in touch with consumer patterns and efficiently offer discounts in the appropriate places.
Kroger’s approach to its finances resided in the conservative range over the last decade. Even with the possibility of Kroger not meeting estimates, investors should expect a small increase in net income and free cash flow even if deflation puts a dent in its top line. No doubt, Kroger is keeping an eye on its expenses. Kroger’s margins expanded across the board last year. As the proverbial icing on the cake, Kroger pays a solid dividend of $0.42 per share per year yielding 1.2% while investors wait for any capital appreciation.
If the financial community frowns on Kroger’s earnings report next week, investors should take advantage of any possible decline in stock price. As of this writing, Kroger’s P/E ratio clocks in at 18. This compares favorably to 24 for the S&P 500. Kroger’s position as the largest retailer behind rival Walmart (NYSE:WMT), its ambitions to move forward and its conservative financial management warrant a second look by the long-term investor.