Shares of Kroger (KR 25.83, -2.61, -9.19%) are getting hit today after the
company missed fourth quarter earnings estimates and guided fiscal 2020 EPS
toward the low end of expectations.
Fourth quarter adjusted earnings fell 11% to $0.48/share, missing estimates by $0.04.
Excluding fuel, the 53rd week, and the LIFO credit, gross margin decreased 93 basis points year/year, which also missed estimates. One third of the gross margin decline came from price investments while the remaining margin contraction came from growth in the specialty pharma business (which carries a lower gross margin but higher operating margin) and warehouse start-up costs.
Identical (ID, comparable) sales excluding fuel grew 1.9%, which was roughly in-line with estimates. ID sales have grown in the 1.5-2.0% range for five straight quarters.
For fiscal 2020 (ending January), Kroger guided adjusted EPS up 4% at the midpoint to $2.15-2.25 and ID sales excluding fuel up 2.0-2.25%. Sales guidance came in toward the high end of expectations while earnings guidance just missed analyst forecasts.
Kroger said the grocery business will improve throughout the year. Management has a clear path to achieve $400 mln in incremental FIFO operating profit growth and $6.5 bln in cumulative Restock cash flow by the end of 2020.
Kroger continues to focus on Restock Kroger initiatives in order to stave off secular headwinds in the grocery business. Over the last year, the company announced partnerships to create customer value, including with Home Chef, Microsoft, Nuro, Ocado, and Walgreens. Meanwhile, alternative profit streams Media and Kroger Personal Finance beat ambitious operating profit goals.
Still, investments in digital endeavors have weighed on profitability. On the call, analysts were mostly disappointed with results and guidance.
Management noted that earnings came in toward the high end of the company's original range last year. The robust fuel margins from last year will become a headwind and digital investments would come down a bit.
Kroger's efforts to innovate are obfuscating the company's financials. Analysts requested more disclosures around profitability for its core business and the impacts of its ancillary ventures. That seems possible as Gary Millerchip is set to take over as CFO after Mike Shlotman retires next month after 77 quarters with the company.
Kroger will forego share repurchases until it returns to its target leverage ratio range of 2.3-2.5x (net debt/adjusted EBITDA) vs. 2.83x currently.
With a $20 bln market capitalization, the stock trades at ~12x and ~7x EV/EBITDA, which represents a one turn discount to Target (TGT).
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