Will Kroger Continue Delivering Great Returns in 2022?

Kroger's short-term outlook will depend on the inflation numbers 

After climbing over 11% since reporting earnings on December 2, investors may be wondering if it’s too late to get in on the rally in Kroger (NYSE:KR) stock. The answer is likely to come when the government releases the Consumer Price Index (CPI) inflation number on December 10.  

At this time, the CPI is expected to come in at 6.7%, its highest level since 1982. The good news is that Kroger stock rallied despite this expectation meaning that analysts are pricing in that number. That means any positive surprise will likely be seen as a positive catalyst for KR stock. The bad news, by extension, is that if the CPI number comes in higher, it will likely result in KR stock turning lower. 

Kroger is a fundamentally solid company that is simply caught in the middle of the supply chain crisis. The easy gains the company made in 2020 are likely gone and now investors may have to adjust to a slower rate of growth.  

A Solid, Not Spectacular Report 

Kroger delivered earnings per share (EPS) growth of 11 cents. The 78 cents per share beating analysts’ expectations for 67 cents per share. This was particularly good news because over the past five years, Kroger has delivered negative earnings growth of approximately 4%.  And the company’s outlook for earnings growth of 12% in the next three years is below the marke average of 13.4% 

Revenue was also slightly higher coming in at $31.86 billion as opposed to expectations of $31.22 billion. Over the next three years, the company’s revenue is only expected to grow approximately 1.8% as opposed to the 4.9% projected for the overall sector.  

Nonetheless, since the company’s earnings report, analysts have been generally bullish about KR stock. Although the consensus rating for the stock is a hold, eleven analysts have boosted their price target for the stock. However, this is another good news bad news situation. Because only six of those analysts have a price target above the stock’s current price.  

Passing Along Costs...For Now 

One number that stood out in the company’s earnings report was its gross margin which came in at 21.66% which was a slight improvement from the 21.4% the company delivered in the prior quarter. This suggests that Kroger has been able to pass along its increasing costs to consumers.  

But the company is expecting to face another round of price increases in January. And if the CPI number comes in above expectations, it may affect the company’s gross margin. This was a point of concern for several analysts even as they raised their price targets.  

Betting on Automated Delivery 

Kroger continues to expand its partnership with Ocado to launch Ocado-powered automated warehouses to fulfill online grocery orders. These customer fulfillment centers (CFCs) use automation and artificial intelligence which the company views as a competitive advantage.  

Luke Jensen, CEO of Ocado Solutions remarks that the company’s technology “...will allow Kroger to achieve the lowest cost-to-serve in the market, combined with the best freshness, accuracy and service.” 

However, at least one analyst is expressing caution about the company's strategy. Kelly Bania of BMO Capital, raised Kroger’s price target but kept the firm’s rating as a Market Perform.  

What to Do About KR Stock? 

If you bought and held Kroger stock since the beginning of the year, you’re sitting on a 40% gain. That's well above the S&P 500 index which has gained 26% in the same time. And that doesn’t include the company’s dividend. While modest, it is reliable. And the company has increased it in each of the last 15 years.  

When you factor in that dividend, Kroger shareholders have been rewarded with a 45% total shareholder return (TSR). And over the last three years, the company has rewarded investors with a 59% TSR.  

This means the long-term outlook for KR stock looks solid for income-oriented investors. However, growth-minded investors may be right to suspect that this rally is coming to an end, particularly if you suspect the CPI number may come in larger than expected. If that’s your belief, a little profit taking now could lead you to a better buying opportunity in 2022.