Analysts are not giving up on Kroger (KR) despite an abysmal earnings release that wiped billions from its market cap.
Shares of the Cincinnati-based grocery giant cratered nearly 10% on Thursday, marking its biggest one-day drop in about a year. Interestingly enough, the one-day decline after its fourth-quarter 2017 earnings marked an even bigger drop for the data point one year ago.
As a result, many analysts along Wall Street tempered their expectations and trimmed price targets. Yet, even the analysts cutting targets were not prepared to submit "Sell" ratings on the stock while the potential for a turnaround persists.
Analysts picked up mainly on the Restock Kroger initiative, a plan that seeks to boost capital investments, cut costs, and increase free cash flow as well as its digital growth as major efforts to keep an eye on.
"We believe KR is now taking much more aggressive efforts to reposition its offering, but still are not fully confident at this juncture whether or not the initiatives will be enough to return to stronger comp growth, especially with competition ratcheting higher from other formats of food retail," Oppenheimer analyst Rupesh Parikh said. "We are closely watching KR's ability to deliver on its Restock plan and other efforts, and remain encouraged by the collective actions to date."
Based on the encouragement, he maintained a $28 price target, which would suggest the punishment on earnings was overdone.
Parikh remained in line with consensus, which remains a "Hold" among analysts covering the stock.
Bulls have also pointed to continuing e-commerce sales growth, which is one of management's main points of emphasis moving forward and one of the few positives from Thursday's print.
"At the end of 2018, 91% of Kroger households have access to pick-up or delivery. By the end of 2019, with full integration of Kroger Ship into our ecosystem, we will reach 100% of America," CEO Rodney McMullen told analysts on Thursday morning.
He added that this will quickly turn into powerful profits for the company as more and more consumers shop online, both through Kroger and its partners like the U.K.-based Ocado.
"In 2018, our digital sales run rate was about $5 billion. Going forward, we are trending toward a run rate of approximately $9 billion," McMullen forecasted. "We are enhancing the customer ecosystem with partnerships that are helping us to redefine the customer experience by building incredible physical and digital experiences, a fantastic offering and an unprecedented convenience."
To be sure, the growth in digital has not yet been able to stem the tide of declining sales overall and has instead remained a headwind based on the substantial capital expenditures required to build out the effort.
As even Walmart (WMT) , a retailer with much more experience in the delivery and e-commerce method, has said it will see some losses in e,commerce ahead, suggesting profitability at Kroger's e,commerce program could prove distant.
Based on that timeline, Deutsche Bank analyst Paul Trussell broke with the consensus and reiterated a "Sell" given the long road ahead.
"We reiterate our Sell rating and $24 price target, based on our view that a return on investments is likely to take longer than forecast, thereby presenting meaningful risks to 2019 and 2020 estimates," he wrote.
Still, he acknowledged that in the long term many pessimists on Kroger may be challenged to sustain their selling bias.
"Longer-term bears have difficulty challenging the potential upside from KR's alternative profit streams," Trussell pointed out, highlighting advertising both online and in-store, Personal Finance and the pharmacy and healthcare businesses as key opportunities.
The question that arises is whether the stock has truly bottomed after earnings.
It is worth noting that the stock jumped about 5% the day after its severe slide on earnings one year ago, but history is not always cyclical.
"We'll need to wait and see if support develops in the $24-$23 area," Real Money technical analyst Bruce Kamich suggested.
For now, as analysts move to the sidelines, that seems to be the day's takeaway. Wait and see.