Investors aren’t sure what to do with The Kroger Co. (KR). In the second quarter, earnings-per-share increased 6.8% year over year to $0.47, beating the Zacks consensus estimate of $0.45. Comps also improved 1.7% (excluding fuel). On the other hand, Kroger lowered its fiscal-year EPS guidance to a range of $2.10-$2.20 from $2.19-$2.28 and expects comps to come in at a ho-hum 1.4%-1.8% (excluding fuel).
The reason for the lowered guidance at that time was primarily food price deflation. Of course, increased competition also played a role, but food price deflation was central focus. However, this was in early September, prior to Donald Trump being elected president. This is important because Trump’s policies are inflationary. That doesn’t guarantee inflation, though. While the economy is humming right now, underlying conditions remain deflationary. When you see low commodity prices, scores of retailers becoming promotional, and food prices coming down, you have to be aware and on your toes as an investor. Real estate and stock prices have appreciated mostly due to speculation, driven by prolonged record-low interest rates.
If the theory above is true, then it’s going to be an interesting fight between Trump and deflation. No president wants deflation. Therefore, you should see a tug-of-war battle. If that’s the case, then it might be risky to base your Kroger investment decision on anticipated inflation. But, while Kroger has taken some hits over the years, it always bounces back. Any food-based company with quality management is going to find long-term success. The quality management factor shouldn’t be overlooked because this determines whether or not the company will be capable of maintaining and gaining market share.
Simply put, Kroger went from being in a bearish situation to a more bullish situation when Trump was elected, but inflation isn’t guaranteed due to underlying economic conditions. If deflation resumes, then Kroger will take a hit due to contracting margins and reduced profitability, but based on Kroger’s history, this would present an investment opportunity, not a reason to flee. For a better view of the Kroger situation, keep an eye on third-quarter earnings, which will be reported December 1 before the bell.
KR has depreciated 10.15% over the past 12 months and currently offers a dividend yield of 1.38%.