Why The Kroger Co Stock Could Fall To Under $30

  • Deflation is helping bargain basement brands like Aldi & Walmart more than Kroger.
  • However, negative comps growth in the restaurant sector may shift some traffic back to the likes of Kroger.
  • Kroger stock is still trading too high above its 200-week moving average to enter now.

The Kroger Co. (NYSE:KR) stock is down an unbelievable 23%+ since the start of the year despite posting some strong numbers in the last few quarters. The company is predicted to post earnings per share of $0.45 which would again be an increase over the same quarter in 2015. Revenue is predicted to come in at $26.82 billion which again, if met, will be almost $1.3 billion higher than the same quarter of 12 months prior. Higher earnings and sales coupled with a falling share price has meant that Kroger's earnings multiple has dropped to what looks like a very attractive level of around 15.

KR PE ratio chart

Source: Kroger stock PE ratio chart by amigobulls.com

Is the bottom in? Why has the market ignored this stock in 2016 despite its solid fundamentals? Some analysts feel it is the company's debt load which, compared to other stocks in this sector (Walmart for example), is definitely high.

Kroger in its latest fiscal quarter reported $9.7 billion of long-term debt on its balance sheet while equity stood at $6.4 billion. Walmart, on the other hand, reported long-term debt of $43.3 billion but a much higher equity value of $75.2 billion. Therefore the market, being forward-looking, must be worried about Kroger's growth prospects. Remember it is not so much that Kroger won't grow meaningfully, but more about how it will grow compared to its peers. Walmart has ploughed in billions into its supercenters, staff and e-commerce over the last 18 months but yet its balance sheet is still very strong. Kroger has gone the acquisition route but the market is still unconvinced.

Food Deflation Hurting Kroger's Comps Growth

Apart from the company's growth path, deflation is a retailers enemy in the sense that lower price realizations affect margins and comp sales growth levels. 2016 has been a tough year for Kroger with respect to sales comps growth and its most recent downgrade by BMO capital, at the start of this month, sent the stock tanking by a further 4%. If popular food categories are tumbling in price, customers can purchase more with the same amount of money, which affects Kroger's comps growth.

However, this is why Kroger is a play on more food inflation and a return to better quality products. Why? Well, the retailer won't be able to compete against the likes of Walmart on price if deflation continues. It is the "gap" in price between Kroger's higher quality products and competitors which will determine comps growth in the next few quarters. This is why food deflation needs to grind to a halt quickly in order to stop Kroger's share price from falling.

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The Shift To Eating In Will Help Kroger

When looking at the quick service restaurants this earnings season, retailers are definitely not losing customers on the fresh food side to them, which is encouraging. In fact, McDonalds and Burger King saw substantial declines in comps growth in Q2 which could mean a shift is underway to cooking at home and/or ordering fresh food from retailing outfits. We have an inflation type effect at QSR's where menu prices continue to go up and a deflation type effect in retailing stores and customers are taking notice. Kroger stands to benefit here from people deciding to buy quality ingredients in stores and eat in instead of eating out. If this trend continues, Kroger's comps will be insulated to some degree as customers, at least weekly, should continue to buy quality produce.

Fundamentals Are Strong But The Stock Has Had A Huge Run-Up

On a fundamental level, there is a lot to like about Kroger. Rising revenues, operating margins and earnings over a 5 to 10 year period all point to a bright future for the retailer. However, when you look at a long-term chart on a weekly setting, the stock is still trading quite a bit above its 200 week moving average. Many feel the stock is currently cheap but it has rallied a whopping 186% since June 2012. The stock's current 200 weekly moving average is below $27. This would be my entry price for a stock like Kroger.

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To sum up, Kroger stock is being punished by the market at present because of low deflation and slowing sales comps. However, this company has excellent fundamentals, excellent technology which includes personalization and high-end tracking of consumer baskets. More deflation may send the stock to under $30. I would be a buyer in the late twenties.

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Comments on this article and KR stock

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harshal.patel.1
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I agree Kroger is way undervalued but Egg price deflation should not be shown here. Egg prices spiked last year when bird flu limited supply. It was a one time event and totally different than the deflationary prices in protein.

Same store comps will not be as high either but also due to price deflation. One and the same issue.
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Do share this awesome post