Kroger Moves Higher On Results And Outlook
Shares of Kroger (NYSE: KR) are skyrocketing in the wake of the Q4 results and newly disclosed growth plans and we think the analysts will send the stock even higher. The analyst's community has been raising their price targets on the stock and is still lagging the market. There’ve been four notes out since the earnings report was released and they all include a price target hike to a consensus near $55. That target lags the market by a good 12% and includes the new high price target of $62 which assumes the stock is now fairly valued. In our view, not only will the price target continue to rise but the consensus rating of firm Hold should improve as well.
Kroger Moves Up On Strong Results
Kroger had a fantastic quarter in which revenue not only grew but it exceeded consensus by over 1000 basis points and came with wider margins as well. The company reported $33.05 billion in net revenue for a gain of 7.5% over last year, topping the consensus by $0.390 billion. The strength is driven by a 4.0% comp, ex-fuel, accompanied by higher demand and pricing for gasoline. On a two-year basis, comps ex-gas are up 14% and driven by a 105% increase in digital sales.
Moving down to the margin, gross margin improved by 300 basis points to 22.2% and was offset by a 700 basis point increase in SG&A. The increase in SG&A is largely due to increased wages and bonuses at the end of the year so a necessary evil in our view. Moving down to the bottom line, the company’s adjusted EPS came in at $0.91, up $0.10 or about 12% YOY, and beat the consensus by $0.17 or 2300 basis points.
Looking forward, the company is expecting growth to continue at the pace of 2% to 4% in 2022 with margin and adjusted EPS well above the consensus. The analysts are expecting EPS in the range of $3.43 compared to the low end of the guidance which is a more robust $3.75. In our view, the company is showing clear momentum and could easily top this guidance as well. Plans for the year include expanding delivery capabilities in at least three major markets and we see that driving 50 to 100 basis points of growth by itself.
Kroger Is A Cash Flow Powerhouse
The key takeaway for us in this report is that Kroger is making money and has plenty of free cash flow. So much, in fact, the company paid down debt, got its leverage ratio to 1.63X EBITDA and below target, increased its cash position, and paid out $2.2 billion to shareholders in the form of dividends and buybacks. The dividend is worth about 1.35% with shares at their new high but the payout is expected to grow. The company is paying out only 38% of its earnings forecast and has a history of growth as well as a solid balance sheet. The distribution CAGR is running well into the double-digits as well so any future increases should be substantial.
The Technical Outlook: Kroger Moves To New High
Shares of Kroger are not only moving to new highs but it looks like the rally is gaining momentum. Price actin is up another 5% now and the indicators are gaining strength. The stochastic shows overbought conditions but that is not a worry right now. The trend is clearly up with strong momentum so overbought conditions could persist for many weeks, months, or quarters depending on the strength of the rally. Based on the strength of the rally to date, we see the potential for another $10 of upside but it probably won’t materialize as quickly as the last $10.
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