Will Kroger suffer from supermarket industry trends?

Investors are worried that grocery stores may be hit by a slump after Whole Foods reported disappointing earnings.

By Benzinga Mar 5, 2014 12:35PM

Kroger store in Arlington,Tenn. © ZUMA Press, Inc./AlamyBy Jayson Derrick


Kroger (KR) is scheduled to report its fourth quarter results on Thursday, March 6 with a conference call to discuss the quarterly results scheduled for 10 am EST. 


The company is expected to earn $1.02 per share and collect $23.14 billion in revenue. Benzinga on MSN Money


Shares of Whole Foods (WFM) tumbled more than six percent following the company's first quarter results on February 12. In addition to weaker-than-expected comparable-store sales, Whole Foods issued downside guidance for its full year 2014.


Investors are naturally concerned over Whole Foods results, which may hint at an industry-wide trend that Kroger is not immune to.


Credit Suisse: Downgrading due to less compelling risk/reward


On January 16, Edward Kelley, research analyst at Credit Suisse downgraded shares of Kroger to Neutral from Outperform with a price target lowered to $39 from a previous $48.


Kroger remains a “well managed, high quality” company that is well positioned for long-term share gains, according to Kelley. However, the risk/reward profile is “deteriorating” due to a more cautious tone on the entire supermarket industry.


Kroger is not immune to industry trends that includes declining volumes and increased competition, according to the analyst who also believes that visibility on improvement in 2014 is low.


While Kroger may continue to outpace the supermarket industry, this does not negate the fact that the stock typically struggles to outperform in periods of low inflation, which will persist in 2014. Furthermore, the analyst sees a further deterioration of industry conditions that could add further pressure on shares.


A major bullish catalyst for shares was Kroger's repurchase program, which has been an important driver of EPS growth. In 2014, Kroger will experience a higher capital expenditure due partly to the recent $2.5 billion merger with Harris Teeter Supermarkets. Not present in Kelley's analysis includes recent developments where Kroger has approached Safeway about buying some of its assets.


At the end of the day Kroger is “still a supermarket operating in a structurally challenged industry.”


Kelley is forecasting the company to earn $0.69 per share.


Bank of America: Short-term risks for conventional grocery stores


Robert Ohmes, research analyst at Bank of America< shares similar sentiments as those echoed by Edward Kelley.


In a brief note to clients, Ohmes believes that grocery stores face risks due to a “still cautious grocery customer” given a sense of economic uncertainty. A reduction of SNAP benefits with an estimated $5 billion annual reduction and potential higher healthcare costs associated with the Affordable Care Act may damper the entire industry.


Ohmes is forecasting the company to earn $0.74 per share and collect $23.06 billion in revenue.


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