3 Reasons KR is Risky and 1 Stock to Buy Instead

Over the past six months, Kroger’s shares (currently trading at $63.75) have posted a disappointing 8% loss, well below the S&P 500’s 8.2% gain. This might have investors contemplating their next move.

Is now the time to buy Kroger, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Kroger Will Underperform?

Despite the more favorable entry price, we don't have much confidence in Kroger. Here are three reasons there are better opportunities than KR and a stock we'd rather own.

1. Same-Store Sales Falling Behind Peers

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Kroger’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.9% per year.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

Kroger has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 23.7% gross margin over the last two years. Said differently, Kroger had to pay a chunky $76.32 to its suppliers for every $100 in revenue.

3. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Kroger, its EPS declined by 29.8% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

Final Judgment

Kroger doesn’t pass our quality test. Following the recent decline, the stock trades at 12.3× forward P/E (or $63.75 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.

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