Kroger's Investor Day Leaves Us Confident in Our View
We suggest investors await a more attractive entry point before buying shares of the narrow-moat firm.
We do not plan a large change in our $27 fair value estimate after narrow-moat Kroger (KR) reaffirmed fiscal 2019 guidance, set fiscal 2020 targets, and established expectations for beyond that point (all of which were near our marks before the announcement). Although the shares rallied around 10% on the news, we had already been optimistic about Kroger’s long-term prospects, believing the company can use its scale, data capabilities, private-label strength, and partnerships to cope with ongoing price pressure. After the uptick, we suggest investors await a more attractive entry point.
Management still calls for adjusted diluted EPS of $2.15-$2.25 in fiscal 2019 and now expects $2.30-$2.40 in fiscal 2020 (before the news, we had called for $2.18 and $2.31, respectively). Leadership also set an 8%-11% total shareholder return target beyond fiscal 2020, with 3-5 percentage points coming from improved earnings and the rest from share repurchases and dividends (excluding any multiple enhancement). Our long-term forecast for 7%-8% average returns was not far off, and we believe conservatism is warranted until Kroger’s alternative income streams and Ocado partnership convert more potential into results.
We believe Kroger is poised to capitalize on its scale and are encouraged that management continues to stress its data capabilities as a long-term source of lucrative, asset-light revenue. While we expect Kroger to use its trove of purchase data (over 95% of its transactions are tied to a loyalty card) to inform its marketing and assortment, we believe it can also sell valuable insights to its vendors, as it can provide analytics based on real shopper decisions. Coupled with its partnership with Ocado, which should improve home delivery economics, we believe Kroger is better positioned than most to succeed despite the sector’s turmoil as other grocers, mass merchandisers, online rivals, and hard discounters compete for a reasonably fixed pool of grocery dollars.
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Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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