Is Kroger's post-payback discount an opportunity to buy? – The fool

Actions of Kroger (NYSE: KR) fell 10% on September 13, after the supermarket chain posted mixed numbers in the second quarter of 2018. The company's business turnover increased 1% over the same period the year before. last year to reach $ 27.9 billion.

After excluding fuel sales, the divestment of its convenience stores and its acquisition of Home Chef, Kroger's business turnover grew by 1.8%, but this slowdown is significant compared to its growth of 2.8% in the first quarter.

In contrast, Kroger's same-store sales (excluding fuel sales) increased 1.6%, compared to 1.4% in the first quarter, marking its fifth consecutive quarter of positive growth in same-store sales. Management also reaffirmed its same-store sales growth forecast of 2% to 2.5% for the full year.

But beware of the margins …

However, Kroger's gross margin – excluding fuel and a $ 12 million LIFO charge (last in, first out) – dropped 36 basis points to 21.3% due to more aggressive discounts, transportation costs specialized pharmacy unit. On a quarterly moving basis, Kroger's FIFO (first in, first out) operating margin fell 26 basis points.

As a result, the Company's non-GAAP earnings (which exclude Kroger's investment in the British Ocado grocery store and other one-time benefits) decreased 5% to $ 336 million, or $ 0.41 per share. On a GAAP basis, net earnings increased 44% to $ 508 million, or $ 0.62 per share.

Kroger nonetheless reaffirmed its non-GAAP earnings guidance for the year of $ 2.00 to $ 2.15 per share, down from 2% to 5%. Analysts currently predict that Kroger 's business figure will remain stable this year and that its adjusted earnings will grow by 4%.

Are Kroger's growth plans still intact?

Kroger is struggling to stay relevant in a market filled with superstores like Walmart (NYSE: WMT), warehouse retailers like Costco (NASDAQ: COST), and e-commerce giants as Amazon.com (NASDAQ: AMZN)who swallowed Whole Foods last year. All of this competition is lowering consumer price expectations and fights are now shifting towards aggressive delivery and pickup options.

Kroger is the largest supermarket chain in the United States, but it still generates much less annual revenue than Walmart, Costco or Amazon, each generating stronger sales growth. Analysts expect Walmart's turnover to grow by 3% this year, Costco's business volume by 9% and Amazon's (boosted by its business activity). in the cloud and Whole Foods) by 32%.

Last year, Kroger launched "Restock Kroger," a three-year turnaround plan that uses massive data and analytics to optimize pricing, product selections, and personalized communications with customers. It is also expanding its private label brands, organic products and meal kits (reinforced by its takeover of Home Chef) to counter Amazon's takeover of Whole Foods. He also launched some of his private label in China via Ali BabaThat's Tmall.

On the digital front, Kroger has launched ClickList, a paid service that allows buyers to buy products and buy them in its stores, and Ship, a new direct shipping platform to consumers. It is also associated with messaging services like Instacart, Shipt and Uber for home deliveries and plans to integrate some of Ocado's online grocery store technologies into its US stores. It even tests a driverless delivery service with an autonomous delivery service start-up, Nuro.

Kroger's digital sales grew more than 50% in the last three months compared with the same quarter last year, but this marks a deceleration from its 66% growth in the first quarter. This is disappointing if Kroger's "transparent" coverage (between traditional and digital services) is considered to have increased from 75% in the first quarter to 80% in the second quarter.

This indicates that all aggressive Kroger ecosystem investments – which weigh on its margins – may still not hold Walmart, Costco and Amazon in check. Kroger is trying to reduce costs by banning Visa credit card payments in its stores (due to Visa's higher operating costs), but this decision could alienate existing customers.

Remains in place of Kroger's competitors

Kroger's shares look cheap at 13x earnings and yield a 1.7% dividend. But I believe that Walmart, Costco and Amazon are all more convincing investments than Kroger – who is desperately trying to make up for a losing position.

Kroger will not be made obsolete anytime soon, but it will likely continue to spend a lot of money to crowd out unimpressive sales growth. As a result, I would stay away from Kroger until his big investments begin to generate visible gains.

John Mackey, CEO of Whole Foods Market, an affiliate of Amazon, is a board member of The Motley Fool. Leo Sun owns shares of Amazon. The Motley Fool owns shares and recommends Amazon. Motley Fool owns Visa shares. The Motley Fool recommends Costco Wholesale. Motley Fool has a disclosure policy.