Considering that its third-quarter earnings leave narrow-moat Kroger (KR) on track to meet our full-year targets, our $29.50 fair value estimate should not change materially in reaction to the news. With the quarter the latest part of a fiscal year that has seen meaningful, prudent investments in repositioning Kroger for the future (including price cuts and space-optimization efforts), we still expect the firm's long-term performance will be characterized by low-single-digit revenue growth and operating margins over the next decade. We suggest investors await a more attractive entry point before building a position, as the shares trade near their fair value.
In the quarter, revenue slid 0.3% on 1.6% identical-supermarket sales growth (without fuel). Year to date, Kroger saw 1.6% top-line growth against 14 basis points of operating margin expansion to 2.3%, relative to our earlier expectations of a 0.5% full-year revenue decline and a 60-basis-point uptick, respectively. Management reaffirmed its fiscal 2018 adjusted EPS target of $2.00-$2.15, consistent with our $2.10 expectation.
We are encouraged that the on-track Restock Kroger initiative is delivering early returns, with an initial focus on cost controls and broadening the grocer’s revenue streams. We believe such efforts are increasingly critical as the grocery industry sees upheaval, with entrants such as Amazon threatening Kroger’s strong standing. With alternative retailers attempting to usurp traditional grocers through mix, convenience, cost, or store experience (or a blend of several factors), we see the firm’s plans as the cost of maintaining operating margins in the low single digits rather than as representing a large profitability expansion opportunity. Still, the plan should help Kroger become more nimble while focusing resources on its more value-generative offerings.
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Zain Akbari, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.