Analysts love to use financial results from retailers as a gauge for the health of the domestic economy. While Walmart (WMT) , Target (TGT) and, of course, Amazon (AMZN) , do give a fairly accurate read on the consumer, it has always surprised me that macro watchers rarely pay attention to the most vital sector of the retail economy: food. The last time I checked we all have to eat.
So Kroger's (KR) disappointing results this morning shined another yellow light on the U.S. consumer. The run to all-time highs for the S&P 500 has been driven by the consumer, as industrial names -machinery, equipment, etc. - are getting hammered on valid concerns on a slowing global economy, especially in China.
But that has zero impact on what consumers buy at their local Kroger. KR shares are down more than 4% in today's trading, as revenues came in light and the company's guidance range of $2.15-$2.20 for 2019 EPS seemed to open the door for disappointment at the low end of the range.
Kroger's same-store sales growth of 2.5% also disappointed the Street but, to be fair, that figure does show consumers are still putting more in their shopping baskets.
Kroger's bottom line is much more insightful than its top line, though. The margin pressures KR is experiencing - gross margin fell 24 basis point year on year - are indicative of the trends faced by Corporate America.
I don't know why the Street focuses on ridiculous "rumortrage" over a China trade deal instead of the fact that profit margins have peaked for this business cycle and are in a sharp decline. When Kroger is bragging in it's press release of a fully-fringed wage rate of $20/hour that is not a good sign for Kroger shareholders.
People are expensive, and higher labor costs have driven the S&P's poor earnings performance -consensus calls for a 0.2% decline in 2019 - not some fairy tale trade war. I believe S&P 500 earnings will decline again in 2020, and I just cannot understand why the stock market is not taking that into account.
So, while Kroger does all the right things with its cash - management announced a re-initiation of active share repurchases for the fourth quarter - the stock is getting hammered. I understand that, but can't understand why other U.S. stocks are not facing the same scenario.
Kroger shares are trading at about 11x management's forecast range for 2020 EPS. It certainly makes sense that management would buy back shares at that valuation.
The S&P 500 is trading at 20x my estimate for 2020 EPS - which is much lower than the consensus -and at that valuation the current wave of a massive share repurchases makes no sense. This is especially true for the NASDAQ, where the P/E stands at a very rich 25x my forecast for EPS in 2020.
Overpaying for low quality assets never works. Kroger took a substantial write-off on its investment in Lucky's Markets in the quarter, and you should be careful that you don't take a substantial write-off on your entire portfolio as we head into 2020. Stocks are too expensive at these levels. Stop allocating incremental capital to them.