It’s Time to Buy the Dip in Kroger Stock Price

Key Points

• Kroger's Q2 results affirm that the September price pullback is a good time to buy.
• The cash flow and capital return remain robust, and are aggressively reducing the share count.
• Analysts and institutional trends align with an uptrend, leading this market to a new all-time high.

Kroger’s NYSE: KR share price started pulling back in late August, opening another buy-the-dip opportunity in a high-quality, undervalued, dividend growth stock. Now that the Q2 results have been released, the sell-off is over, and the time to start buying its stock is back. Kroger’s results affirm its market-leading position, strength relative to competitors, and healthy cash flow, which allows for dividends and share buybacks.

Share buybacks are central to the story, as this company maintains a healthy balance sheet and aggressively reduces its share count. The dividend isn’t bad, either. 

The share repurchases are aggressive. The failed Albertson’s takeover resulted in a cash hoard that is being used to buy back shares. The current authorization includes $5 billion in accelerated purchases expected to be completed in the current quarter and an additional $2.5 billion expected to be used incrementally over the coming few quarters. 

The impact in Q2 is an approximately 8.45% year-over-year (YOY) and year-to-date reduction in the share count and an expectation for aggressive repurchases to continue long into the future. 

The cash flow and balance sheet can answer questions about the company’s ability to continue buying shares. Q2 highlights include red flags such as increased debt and reduced equity, but a robust cash position, increased current and total assets, and a massive reduction in share count offset them.

Regarding the debt, the company leverages debt to assist growth and capital needs but maintains a fortress-like position with low leverage and investment-grade debt ratings. 

Kroger: Mixed Results Offset by Margin Strength and Guidance

Kroger reported a mixed quarter in Q2, with $33.94 billion in net sales up 0.1% YOY and short of MarketBeat’s reported consensus. However, the reported result includes the impact of divestiture that, when adjusted for, leaves the ongoing business up by 3.8%, driven by a substantial 3.4% comp-store increase.

Sales were underpinned by e-commerce, which grew by 16%, and the persistent value presented to consumers. 

Another area of strength is the margin. Divesting the pharmacy business aided a margin increase that began at the gross levels and continued to the operating levels. Gross margin widened by 40 basis points while the OG&A expense fell by five, leaving operating income and earnings up by leveraged amounts.

Adjusted earnings grew by 1,200 basis points and outperformed by 400, leading management to lift its guidance for the year. 

The guidance is doubly strong because the company raised its outlook for revenue and earnings to levels above the consensus estimates, and the actual results may be stronger. The company is well-positioned to grow and has the capital resources to make it happen. 

Analysts And Institutional Trends Support Kroger’s Stock Price Uptrend

The analyst and institutional data for KR’s stock price are bullish. The first update following the Q2 release is a reaffirmed rating and price target, pegging the stock at Outperform compared to the consensus of Hold, with a price target at the high end of the range.

It assumes more than 20% upside from the critical support level and aligns with trends that include increased coverage, a firm rating, and a rising price target. 

Institutional trends for this retail stock include a solid 81% ownership rate and them buying on balance all year. The data reveals increased selling in early Q3 that aligns with the stock price pullback, but even so, the buyers outpaced them by a slim margin, aligning with the stock price uptrend.

The likely scenario is that institutional selling will abate as the quarter progresses, the stock price will continue its uptrend, and move to a new high, possibly before the year’s end.