Kroger Stock Poised To Decline After A 17% Rally?

Kroger’s stock (NYSE: KR) is up 17% to around $34 levels year-to-date, compared to an 8% growth for the broader S&P 500. The retailer’s revenue grew 10% year-over-year in the last 2 quarters, as it saw a sustained grocery sales boost amid the pandemic. While Kroger has outperformed the broader markets, we believe the stock could likely decline as concerns surrounding Covid-19 subside. The retailer’s growth rate was unimpressive before the pandemic struck at about 2% CAGR over the past three years. There is a likely chance that growth might return to that disappointing pace once the coronavirus threat abates. Kroger’s stock has also jumped 30% since early 2018. Our dashboard, ‘What Factors Drove 30% Change In Kroger Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Kroger’s stock price gained only 10% over the past two years (2017-2019). The company’s revenues declined slightly from $123 billion in 2017 to $122 billion in 2019. This combined with an almost 12% drop in net income margin from 1.5% in 2017 to 1.4% in 2019, led to its earnings per share falling by 3%. The company’s revenues contracted due to decreased supermarket fuel sales, a fall in the sale of its convenience store business unit, and disposal of Turkey Hill Dairy and You Technology.

Kroger’s P/E multiple grew from 12x at the end of 2017 to 14x by the end of 2019. It then rallied further to about 17x now, reflecting an 18% increase in P/E multiple since early 2020. Going forward, we believe there is a downside risk when the current P/E is compared to levels seen in the recent years.

How Is Coronavirus Impacting Kroger’s Stock?

Kroger’s sales have been growing rapidly since customers flocked to stock up on important items, as stay-at-home orders and travel restrictions were imposed. Consequently, the retailer’s same-store sales (excluding fuel) rose 19% and 15%, respectively, in the first and second quarters of 2020. But prior to the pandemic, Kroger’s same-store sales grew only 2% in fiscal 2019, slightly higher from 1.8% in fiscal 2018.

With the gradual opening of economies and a relative slowdown in the growth rate of Covid cases, people have started to go out and are expected to have more meals outside. It is quite possible that Kroger’s sales might fall down to normal levels once panic-buying stops. In addition, the recession could also put pressure on the supermarket industry in the coming times, largely due to a rise in unemployment and lower consumer sentiment.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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