Kroger’s Stock is a Play on Food Inflation

Grocery chain operator The Kroger Company NYSE: KR stock has been rising along with other grocers as the markets figure food inflation will bolster margins and the bottom line. While investors initially assumed the pandemic triggered an acceleration of stockpiling which results in a market-induced channel stuffing, it’s become apparent that consumer behaviors have transformed. Consumers are spending more on groceries and shopping more often as the pandemic induced “out of stock” fears are still prevalent especially with the surge in the Delta variant. As much as the Federal Reserve states that inflation is transitory (temporary), markets are realizing that inflation is not only here to stay but will continue rising especially when it pertains to food. The latest CPI reports indicate the fastest rise in inflation in years at 5.4% in the 12 months ending in July. However, this report leaves out food and energy. Food inflation rose 0.7% in July 2021 alone. The food index increased 3.4% in the 12 months ending in July, but only 2.4% if ending in June 2021. This marks a sharp spike in food inflation and investors expect that to show in the bottom line. Prudent investors looking to position themselves for the continued rise in food inflation can monitor shares of Kroger for opportunistic pullback entries. 

About Kroger

The Kroger Company is the largest supermarket in the U.S. operating 2,800 stores in 25 states. The Company was a pandemic benefactor as it was deemed an essential service during the COVID-19 pandemic. It experienced extreme cases of customer stockpiling which spiked revenues during a period where most businesses suffered as a result. As the pandemic is in the rearview, shares are exhibiting extreme bullishness as they spike to pre-pandemic highs approaching all-time highs even as we are well into the reopening phase. The underlying strength is based on the surge in food inflation that is expected to bolster the bottom line as they pass the rise onto consumers.

Upside Guidance

In the Q1 2021 earnings release, Kroger provided upside guidance for full-year 2022 with EPS expected between $2.95 to $3.10 compared to $2.83 consensus analyst estimates. To further bolster sentiment, the Company approved a $1 billion share buyback program.

Q1 2021 Conference Call Takeaways

CEO Rodney McMullen detailed the transformation of its customer, “Our customers are in a time of transition. During the quarter, we began to see some pre-pandemic habits resume. For example, smaller holiday gatherings are likely to fade as more than half of our shoppers believe holidays will return to normal by the 4th of July. We are also seeing customers shop more frequently as COVID restrictions ease. Importantly, we saw a continuation of several pandemic trends. This includes heightened digital engagement across demographics; expanded consumption in key fresh areas like meat, produce, and natural foods; and trading up to more premium products.” He continued, “New trends are emerging as well as customers settle into new routines. In a recent survey of our customers, a remarkable 92% of the people say they enjoy cooking the same or more than they did pre-COVID. And as people’s busy social lives pick up, more customers are looking for convenience in cooking options. We continue to utilize our data to understand those behaviors that are more permanent in nature. Whether customer habits are returning, hardening, or emerging, we will continue to meet the customer where they are and use our data science expertise to be where they are going.”

KR Opportunistic Pullback Levels

Using the rifle charts on weekly and daily charts can provide a near-term perspective of the playing field for KR stock. The weekly rifle chart is compressing as the Bollinger Bands (BBs) contract. The weekly breakout peaked just below the $24.49 Fibonacci (fib) level as the weekly market structure high (MSH) sell triggered under $19.70. Incidentally, the weekly market structure low (MSL) buy triggered above the $18.30 level. The weekly 5-period moving average (MA) is sloping down at $20.06 as it overshoots the 15-period MA at $19.76. The daily rifle chart has been in a downtrend with a falling 5-period MA at $19.65 with a stochastic mini inverse pup pointing at the daily lower BBs at the $18.58 fib. Prudent investors can monitor for opportunistic pullback levels at the $18.58 fib, $17.96 fib, $17.51 level, $16.69 fib, $15.43 fib, and the $14.09 fib. The upside trajectories range from the $22.51 level up to the $29.00 fib level.