Kroger May Be a Sneaky Good Way to Play the Coronavirus

Kroger (NYSE:KR) reported fourth-quarter 2019 earnings on March 5. While the numbers weren’t outstanding, they showed positive momentum. Earnings per share (EPS) came in at 57 cents, larger than the 56 cents FactSet estimate. Revenue met expectations of $28.89 billion.

One of the most important metrics for retailers of all types is same-store sales. Kroger reported same-store growth of 2.0% in the quarter. That was slightly lower than the 2.1% growth that analysts had expected.

The company also issued 2020 guidance. In terms of earnings per share (EPS), Kroger is forecasting $2.30 to $2.40. Analysts are projecting an EPS of $2.33. The company is also forecasting same-store sales growth of 2.25% for 2020.

The news had to be encouraging for investors. Kroger had posted a miss on revenue in the third quarter after acknowledging that the company had overcorrected in their push into e-commerce.

Kroger is one of the leading grocery “pure plays”. But many investors may not be familiar with the regional chain. Kroger stock is up 8% in the last 12 months, and the stock is up 7% for 2020. This compares favorably with the S&P 500 that is down 3% for the year.

Buy Online, Pick Up in Store is Not Going Away

The digital movement is not going away.  What first seemed like a fad, now appears to be a trend that is only going to grow. Consumers are now deciding that they would rather not go into a store. Of any kind. At all. Ever.

Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) tend to draw the headlines when it comes to e-commerce. Walmart is increasing its revenue by 2% to 3% a year. And it says U.S. e-commerce will increase by 30% in fiscal 2020. UBS estimates that groceries will make up more than half that growth.

So Walmart is the right play? Maybe it will, but then again maybe not? Investor interest in the stock has driven it up to 23 times forward earnings projections. And that’s where Kroger comes in.

Like Walmart, Kroger is projecting an increase in EPS of 4% to 6%. That’s the same as Walmart, and you can pick up shares of Kroger for just 13 times earnings. Plus, Kroger reported that digital sales were up 22% so investors don’t have to be concerned about Kroger incurring costs to catch up with this trend.

In fact, Kroger is currently partnering with Microsoft (NASDAQ:MSFT) to experiment with digital store displays. Not only will this make the stores more appealing for shoppers, it theoretically will increase the store’s advertising revenue. In another pilot program, Kroger is teaming with Walgreens Boots Alliance (NYSE:WBA) and doing business with each other’s stores. And Kroger is even experimenting with driverless delivery vehicles in Houston.

And remember, Kroger is a pure play on groceries. I see Shipt logos throughout my privately owned regional grocery chain. So I don’t doubt that home delivery of groceries is a real and growing industry.

I suppose I’m too much of a control freak. I don’t hate grocery shopping. I want to pick out fresh ingredients myself. And it would seem I would either buy too little or buy too much if I relied on a service.

But, as an investor, we have to be careful to invest in facts, regardless of how well they reflect our personal experience. And that brings me to the coronavirus.

Will the coronavirus change the future of grocery shopping?

You can’t turn the news on without hearing reports that consumers are stocking up. They are canceling trips. They are sequestering themselves in their homes. It doesn’t seem like consumers really needed too much incentive to do that, but it is happening on an even larger scale.

With that in mind, Kroger stands to benefit until the coronavirus fears abate. In every crisis there are winners and losers. While I wouldn’t want to own stock in a cruise line right now, it might be a great time to own Kroger. The company did not adjust their full-year 2020 forecast to account for the potential effects of the coronavirus.

Certainly Warren Buffett couldn’t have known about the coronavirus when he chose to invest in Kroger. But Buffett’s firm Berkshire Hathaway (NYSE:BRK:B) recently bought a 2.3% stake in the grocery chain, and this would certainly seem to be a prescient investment at the moment.

In time I imagine the coronavirus will move off the front page and the markets will come down. However, every time our nation goes through these situations, something fundamentally changes. Sometimes change happens organically. And sometimes it is thrust upon us. I imagine there are some consumers who are experimenting with home grocery deliver for the first time. If they have a positive experience, will this become a part of their permanent lifestyle?