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Kroger Is Out Of Momentum, BofA Says In Downgrade

The bullish case for Kroger Co (NYSE: KR) can no longer be justified, as it will be more difficult for the grocery chain to beat expectations moving forward, according to BofA Securities.

· 09/14/2020 11:04

The bullish case for Kroger Co (NYSE:KR) can no longer be justified, as it will be more difficult for the grocery chain to beat expectations moving forward, according to BofA Securities.

The Analyst: Robert Ohmes downgraded Kroger from Buy to Neutral with a price target lowered from $42 to $40.

The Thesis: Kroger's online grocery sales performance was strong in the recent quarter, but momentum is likely slowing down as restaurants recapture market share lost to the grocery category, Ohmes said in the downgrade note.

Restaurant spending was down just 8% year-over-year in the first week of September, and this creates difficult comparisons for Kroger in the next fiscal year, the analyst said. 

Kroger's momentum since the start of the COVID-19 pandemic brought strong profits in a low promotional environment, he said. 

But industry profitability is likely to moderate moving forward while Kroger continues to improve pricing through the elimination of pickup fees and other initiatives, Ohmes said. 

Kroger's buildout and scaling of its Ocado network is still "a long way out" in terms of acting as a long-term benefit in delivery solutions, the analyst said. 

And Kroger's strategy to integrate a third-party marketplace offering this fall implies the grocery chain needs to improve its offerings to better compete against omni-channel leaders like Walmart Inc (NYSE:WMT), he said. 

Kroger's P/E stock multiple expanded from an average of 11 times over the past two years to around 14 times. But a "more muted" outlook after strong results in the first half of the year implies that a neutral stance on the stock is justified, according to BofA. 

KR Price Action: Shares of Kroger were trading lower 3.96% at $33.01 at the time of publication Monday. 

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