KR: Quality At A Discount

I write a lot about Kroger (KR) – America’s leading grocer – so I was going to spare you guys when it got hit Thursday after earnings. Until I read a column in Friday’s WSJ by Heard on the Street’s Jinjoo Lee (“Kroger Gets Stuck In The Middle Aisle” [SUBSCRIPTION REQUIRED]). She covers a lot of the same stocks that I follow and I always enjoy her columns – including this one.

Lee makes the point that KR is in the middle in terms of pricing. It’s cheaper than high end grocers like Whole Foods but more expensive than lower end ones like Walmart (WMT). As a result, its sales are lagging the upper and lower ends in the current economic environment. ID Sales were only +3.5% in the quarter and the full year guide is +1% to +2%. But in their press release, KR said that underlying ID Sales were +5% in the quarter and expected to be +2.5% to +3.5% for the year – adjusting for the reduction in pharmacy sales from the end of their deal with Express Scripts on Dec 31, 2022. That still might not be as good as WMT but it’s by no means anemic.

Lee also asserts that KR shares are still not cheap even after Thursday’s hit. But they’re trading at only 10x current year EPS guidance of $4.45-$4.60. I can’t think of a cheaper stock of this quality off the top of my head. And if you’re not a believer in the “New Bull Market” narrative – like me – then a defensive stock like KR is a perfect fit. Dips in KR are a buying opportunity for the foreseeable future IMO.