Kroger Stock Presents Investors With a Crisis of Conviction

Kroger (NYSE:KR) stock is trading at nearly all-time high levels. And that’s interesting considering that the outlook for the grocery industry is waning. Kroger operates in a low-margin business. But the grocery chain was a pandemic winner as consumers looked to stock their pantries and freezers in order to cook at home.

That narrative will get tested if the economy reopens in earnest, particularly in the second half of the year. The company reported earnings on March 4 and delivered a split result. They beat on the bottom line, but came in with revenue that was slightly lower than expected.

Nevertheless, not all the news was bad, Kroger reported that it was continuing to gain market share at the same time the company’s fixed costs are declining. The company continues to grow its omnichannel model and said its pick-up and delivery locations now cover some 98% of customer households. And, the company registered $26.2 billion in sales of its private-label brands, its best year ever.

In addition to delivering a solid full-year outlook for last year, Kroger management indicated the company should be able to beat analysts’ expectations for 2021.

However, with a stock price that’s hovering around 5-year highs, it’s fair to ask if KR stock has more juice left in the tank.

Fighting to Stay Relevant

Speaking at the Internet of Things World Conference in 2019, Brett Bonner, Kroger’s vice president of research and development, spoke about the company’s purposeful decision to find the technology solution that could maximize their spending. They landed in the Internet of Things (IoT) world. And the company is recognized as having been an early adopter of some cutting-edge digital solutions.

For example, in 2020,Kroger announced plans to roll out Everseen’s Visual AI technology in all 2,500 of its stores. This was after the company had piloted the system in March. The goal of the program is to reduce self-checkout errors while reducing loss prevention.

And the company is beginning to receive a return on its investment. In the company’s earnings report, it reported that for the full year it posted a 118% jump in online sales. That helped boost the all-important same-store sales growth to 10.6%, which beat the analysts’ forecast of 10.2%.

However, the issue of the moment is that they are becoming commonplace. None of these solutions create a moat for the business. Many of the solutions adopted by Kroger are being used by its competitors. And there’s only so much a business like Kroger can do for an encore. At some point, the competition is fighting for the same customer in a low-margin business.

Kroger Is a Long-Term Value Stock

As I writing this, KR stock appears to be making a bullish move. The stock’s 50-day moving average is about to cross above its 200-day moving average. If that move happens, the stock might have a decent run. In this market, anything’s possible.

Kroger has taken many steps to keep pace with the competition. You have to appreciate the growth in digital sales and the store’s seamless adoption of an order online, pickup at store model.

However, since the beginning of the year, Kroger has been downgraded by several analysts and the stock is trading right about at its consensus 12-month price target. Perhaps analysts will give the stock a closer look after earnings. If not, it’s hard to see the stock going much higher.

That being said, Kroger does remain a solid dividend stock and one that has increased its dividend every year for the last 14 years. You’ll have to decide if that’s enough for you to pull the trigger.