Grocery Giant Looks to Beat Expectations for the Fourth Time

Fourth quarter Kroger earnings are slated for release on December 3

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Cincinnati based Kroger Co. (NYSE:KR) is one of the largest retail companies in the world, operating nearly 2,800 stores in 35 U.S. states. The company's operations include supermarkets, pharmacies, jewelry stores, and more. With a majority of its stores being labeled "essential businesses" by law, Kroger has outperformed most of the retail sector throughout the coronavirus pandemic. Will this sector outperformance continue, and is this kind of revenue growth sustainable in the future?

Kroger stock is up 12% in 2020, and scored a four-year high of $37.22 on Sept. 3. Since then, the shares' 50-day moving average has guided the equity lower. More recently, KR seems to have consolidated between the $32-$33 levels.

Kroger Co. will look to beat earning expectations for the fourth consecutive time this week, when the company steps up to the earnings confessional Thursday December 3 before the open. The grocery giant has beat earnings expectations on three of its four most recent earnings reports. In the first quarter of 2020 Kroger topped expectations by a margin of $0.02.  In the second quarter, the company beat expectations by a margin of $0.13. More recently, Kroger beat its earnings target by $0.18, or 33%. For Thursday's trip in the earnings confessional, Kroger is expected to report an EPS of $0.66.

The Kroger Co. company has a forward dividend of $0.72, and a dividend yield of 2.22%. The Kroger Co. has recently announced a $0.18 dividend, payable on December 1.

For those looking to invest using options on Kroger stock, KR currently sports an incredibly low ranking of 2 out of 100 on the Schaeffer's Volatility Scorecard (SVS). This scorecard allows us to identify which underlying equities’ options have historically had underpriced or overpriced options. We rank each equity’s options relative to the others in our database. Low SVS readings like this one point to the stock having consistently realized lower volatility than their options have priced in -- pointing to possible premium-selling candidates. 

Despite the consecutive earnings beats and the strong revenue growth in 2020, The Kroger Co. has been largely inconsistent when it comes to its net income growth over the past four years. The company had actually hit a plateau in its revenue growth between 2017 and 2020. However, the coronavirus pandemic has allowed Kroger to break free of the plateau and grow its revenue by nearly $7 billion in just the past 12 months.

Kroger likely will not be able to maintain its current revenue given the special circumstances surrounding the explosive growth. The company’s price-earnings ratio is expected to drop from 9.92 to 12.36. Although a forward price-earnings under 15 is typically a good signal for value investors that KR stock is undervalued, in reality Kroger will struggle to see sustained growth once the vaccine is fully released. The Kroger Co. will likely return to previous levels as far as revenue is concerned. It is difficult to see Kroger stock increasing much more from its current price.

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