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Supermarket operator Kroger (NYSE: KR) is on a roll. The company is racking up industry-leading growth, is taking share from the competition thanks to its booming organics business, and recently swallowed up smaller rival Roundy’s, owner and operator of the popular Mariano’s banner.
Kroger, the biggest U.S. grocery chain, also owns the Ralphs, Smith’s, and Food-4-Less grocery chains, as well as its namesake Kroger supermarkets. Shares of Kroger are up an astounding 73% in the past two years. For comparison, the S&P 500 index is up just 6% in the same time.
And yet, when Kroger released fiscal second-quarter earnings on Thursday, the stock fell 7% just because the results did not meet analyst expectations. But investors shouldn’t be worried: Kroger remains the dominant brand in its industry and a growth company.
When Great Isn’t Good Enough
Kroger reported that comparable-store sales, a crucial metric for retailers that measures sales at locations open at least one year, rose 3.7% last quarter. That missed analyst expectations, which called for 4.5% growth.
Investors were also disappointed by Kroger’s guidance for the remainder of the fiscal year. The company expects to grow comparable sales by 2.5% to 3.5% for fiscal 2017, which would be a steep decline from the 5% comparable sales growth reported in the previous fiscal year.
Still, Kroger’s earnings per share grew 5% year-over-year, to $0.57 per share, which beat the average analyst expectations by three cents. And, comparable sales increased 3.9% year-over-year. Last quarter represented the 49th consecutive quarter in which Kroger reported sales growth, and last fiscal year was the 11th in a row in which Kroger took retail market share.
Kroger Earnings Face a High Bar
Kroger’s results are only disappointing today in the context of the expectations heading into earnings, which were clearly too high. Kroger has done so well in recent quarters, that analysts kept ratcheting up their forecasts and price targets. But when this happens, sooner or later the bar is set too high.
Kroger’s results were very strong. The company is still growing at rates that are not only quite good in isolation, but are especially impressive given the struggles throughout the grocery industry right now. On the conference call, Kroger management took some time to address the competitive threats that have analysts and investors worried.
For example, two specific threats to Kroger that have emerged in recent months are Blue Apron and Amazon.com’s (NASDAQ: AMZN) Amazon Fresh service. Blue Apron is a service that provides all the necessary ingredients for making great meals at home, directly to one’s doorstep. Meanwhile, Amazon Fresh provides next-day and early morning delivery of fresh grocery, everyday consumer products, and Amazon.com items.
CEO W. Rodney McMullen responded by saying that Kroger is uniquely positioned to constantly adapt to changing consumer tastes. There is reason to believe him; Kroger has been very active in expanding its organics offerings, and it has been aggressive in M&A.
Investors should view these declines as a pause to refresh, rather than a significant deterioration in the business. Many grocery chains are having a hard time keeping up with the rapidly-evolving consumer demands, not just Kroger. But Kroger is doing far better than most. It has been there every step of the way to listen to what consumers want and adapt accordingly.
Kroger Still Worth Owning
Kroger stock has retraced some of the massive gains racked up over the past two years, but this is still a high-quality company worth owning.
The company still has plenty of growth opportunities going forward, as American shoppers are increasingly turning to natural and organic foods. Kroger has the ability to meet this demand very effectively. If and when competitive threats emerge, Kroger has the financial flexibility to simply buy any potential threats.
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