Over the past six months, Kroger’s shares (currently trading at $58.18) have posted a disappointing 15.2% loss, well below the S&P 500’s 12% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Kroger, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Kroger Will Underperform?
Even though the stock has become cheaper, we’re cautious about Kroger. Here are three reasons why KR doesn’t excite us, plus one stock we’d rather own.
1. Lack of New Stores, a Headwind for Revenue
A retailer’s store count often determines how much revenue it can generate.
Kroger listed 2,781 locations in the latest quarter and has kept its store count flat over the last two years while other consumer retail businesses have opted for growth.
When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.
Kroger has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 23.9% gross margin over the last two years. That means Kroger paid its suppliers a lot of money ($76.10 for every $100 in revenue) to run its business.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Kroger, its EPS declined by 20.9% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
Kroger falls short of our quality standards. Following the recent decline, the stock trades at 11× forward P/E (or $58.18 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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