The crumbling economy, plagued by heavy job losses and waning consumer discretionary spending has weighed heavily upon Kroger Company (KR), one of the largest grocery retailers. This reinforces our conservative view on the stock’s performance in the near future.
We now expect Kroger to Underperform, compared to peers with a target price of $18.00. Earlier we had a Neutral recommendation on the stock.
Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers has compelled Kroger to cut prices, hurting its sales and margins. Consumers are now prioritizing their purchases, trading down to cheaper substitute brands and shopping for groceries at low-price leaders such as, Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST).
The company reported lower than expected third-quarter 2009 results. Kroger’s quarterly earnings of 27 cents a share, missed the Zacks Consensus Estimate of 36 cents, and also dropped 25% from 36 cents delivered in the prior-year quarter. This has prompted management to issue a more pessimistic earnings outlook.
Consequently, Kroger trimmed its full-year 2009 earnings forecast to a range of $1.60 to $1.70 a share, down from $1.90 to $2.00 previously anticipated. The company’s conservative outlook underlines the raging competition.
Moreover, Kroger’s debt-to-capitalization ratio (62.4%) is also substantially higher, which could adversely affect its creditworthiness making it more susceptible to the economic downturn and competition.
Read the full analyst report on “KR”
Read the full analyst report on “WMT”
Read the full analyst report on “COST”
Zacks Investment Research
