Kroger earnings: Share price decline is a buying opportunity (NYSE: KR)

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Kroger’s first quarter earnings

Kroger (NYSE:KR) since announcing its first-quarter results last week is now around $3 a share, or 6% below its pre-earnings share price. For some, this may seem disconcerting given the strong sales and earnings exceeded what we saw in the quarter. Additionally, Kroger reported growth in sales, gross profit, operating profit as well as net profit during the first quarter of 2021 and also increased its guidance for fiscal 2022. However, this was the ‘old reliable’Gross marginKroger’s metric that caught Wall Street’s attention in this year’s first quarter earnings. Kroger’s gross margin in the first quarter of this year was 21.63% while the same metric in the first quarter of last year was 22.64% temporarily sent stocks into a tailspin, but what investors need to keep in mind is this: the market will always have short-term fears (which are currently l inflation) and the uncertainty surrounding these fears will always lead to high volatility. Investors are mostly brushing off this “noise” and instead focusing on the trends that have brought Kroger to the position it is in now.

Also, as mentioned earlier, the decline in gross margin in the first quarter of this year has not been repeated as we move down the income statement. In fact, the retailer (knowing what was to come) excelled in controlling operating costs, resulting in a significant increase in operating and net profit over the same 12 month period prior. Kroger’s post-earnings slump caused shares to briefly dip below the stock’s 200-day moving average before buyers moved quickly to recover the level in recent sessions. Suffice it to say that we believe we currently have an excellent long-term buying opportunity in Kroger for the following reasons.

Kroger returns to its 200-day moving average

Kroger Technical Chart (fetches 200 day average) (Stockcharts.com)

Management Stewardship

Although external factors such as inflation and supply chain headwinds are mostly beyond the company’s control, management is fully responsible for areas such as dividend, number of shares as well than growth in equity. From this perspective, management continues to reduce the number of shares outstanding (730 million), book value appears on track to pull $10 billion shortly, and the company’s dividend has now increased over the past 13 last consecutive years. While the forward yield of around 1.74% isn’t a big calling card for Kroger, investors should look at the stock’s “total return” potential, which we see in the company’s fundamentals here. -below.

Fundamentals

CEO Rodney McMullen spoke on the recent earnings call about how uptrends in Fresh, Kroger, personalization brands and Digital and Boost members all work together to create more value for the customer as a whole. Despite the aforementioned gross margin growth issue, Kroger is still reporting nearly 9% of its equity, and free cash flow of over $5 billion has never been stronger. Followers of our work will know that we think growth metrics are overstated in the short term, especially when you’re dealing with a company that generates the amount of cash flow that Kroger currently generates. The forecast has been raised for FY2022 on the assumption that inflation will remain high, so we may even see growth higher than the 6%+ forecast in this FY. Suffice it to say, while Wall Street wants you to focus on the ramifications of inflation for Kroger (Fear), long-term investors are much more focused on the retailer’s financial model (Fundamentals) and the how value is increasingly added to the company’s customers. .

KR Stock Valuation

Given Kroger’s forward GAAP earnings multiple of 13.34 and forward cash flow multiple of 5.56, we see stocks are highly priced here. In fact, Kroger’s free cash flow yield of almost 15% right now really demonstrates how unimportant the company’s current dividend yield is. It’s all about total return and even if we lower our expectations and bring that free cash flow return back to the 10% mark, investors should still beat the prevailing rate of inflation, which is obviously key to the future. current time to protect its purchasing power. .

Conclusion

Gross margin is an easy target for Wall Street to exploit in high inflation environments. The reason has to do with growth, as costs are expected to match or even exceed initial inflation. However, when we take a long-term view and look at Kroger from the perspective of its profitability, valuation, and how it rewards its shareholders, Wall Street’s argument seems overblown, especially since the shares bounced off long-term support. We look forward to continued coverage.