Ca$htag$: Squeezed Between WMT & COST, KR Seeks Way Out

0:00time now for our cash tax segment. For that, let's bring in our next gas and that it's Megan Brandley Vice President of Research at Lake Folio's checking out new sentiment data on CROGRA today. So those shares ticking a little bit high or even in a week market ahead of its results tomorrow. But this one has been a week one year to date, year over year. So Megan, what is your latest sentiment data look like? Yeah, whenever we look at CROGRA, this is one that we've been watching demand and sentiment both kind of tick lower over the last year. And this is tough because the consumer, as we know, is being very selective and very deliberate about where they shop. And so when we look at CROGRA, we have demand about flat on a year over your basis. So for us, this says that perhaps some of the bleeding may have stopped. We don't see super significant signs of a turnaround in consumer behavior. But I think it is relevant to see that kind of a plateau that you're watching there where we have demand down about 2% year over year on a 90 day moving average. That's that yellow line. But we've got it about flat on a 30 day

1:02moving average. So some signs of improvement there on the consumer demand front. But at a high level, I think that the bigger story here is what CROGRA is doing to try to turn things around. You know, it's got new leadership at the helm and ex, ex leadership team from Walmart. And so we see some shifts here where he's talking about creating a more consistent experience, kind of leveling the playing field when it comes to the top performing stores. So about half of its leader performing really well in the bottom half aren't. And so kind of evening that out and creating a better overall experience for consumers. And really that's what we see when we look at sentiment data is when consumers have a choice they'd rather go to a publics and when they're trading down, perhaps they're skipping CROGRA altogether and trading down to a Walmart or an Aldi. And so I think right now CROGRA is a story of being a retailer kind of at the middle of a K that is being squeezed where high earners are skipping all together for a better experience. And when they are trading down

2:03or if it's a lower income consumer, maybe they're already seeking that value elsewhere. Yeah, Megan, this is a company whose stock chart doesn't look great. Though they're putting up modest e-commerce sales, their home brands are doing better than the national brands, but they guided. They guided. Here's the numbers. They guided flat sales. They guided flat earnings per share. They guided lower operating cash flow down to 6.7 billion. The one good thing is the valuation is getting extremely inexpensive. But if the world as we know it is pivoting or shifting to the likes of Amazon and Costco and Walmart and even Target that's doing better, are they kind of losing their place in the overall shopping world? Where do they fit in, Megan?

3:04Yeah, I think you're right. And it's interesting to say that they could be losing their place because their footprint and their scale is massive. And so this is a tremendous opportunity. If they can provide the value to consumers and right now that seems to be what they're really lacking is that when consumers are given the choice they'd rather go shop at a Walmart or at a Target or at a Costco, like you mentioned, consumers now are really, really deliberate with their dollar. I think that's the key takeaway that we've even learned from this last week of earnings is that consumers are really, really focused on where can they receive the best experience and the best value. And you can see on this comparison chart that Kroger has just fallen behind some peers. I think it is important to note, as you mentioned though, that the market somewhat expects this. I don't think that this is necessarily a surprise. The stock is, I believe, over 20% off of 52 week highs and has had a tough year. And so when we head into this we see, okay, the bar is low. And perhaps there are some bright spots. You know, digital is a bright spot. The retail media is

4:10a bright spot from last quarter, but at a high level, just in general, we see some of those discretionary purchases just not converting. And so that may hurt near term a company like Kroger that perhaps is more reliant on, obviously people spending money on groceries and if consumers are pulling back and kind of being more selective with that spend, that's not necessarily good for a grocer. But so to be fair, and this is what I wonder for what they're trying to do. One of the reasons Walmart started pulling ahead over the past several years. I know this year has been more challenge for Walmart in terms of shares has been because they leaned into grocery, right? And then when you look at their numbers, you know, more than 60, I think it was about 60% something like that. Revenants from grocery, right? So people have to eat. So I wonder if that's partly what Kroger is trying to lean into in terms of poaching the executive team, essentially, or a good chunk of the executive team from Walmart. Do you think that's what's going on there, Megan? Yeah, I think that that's a big piece of it, you know, that digital bright spot, as I mentioned,

5:13that has been something that has worked well for the company. So the more it can leverage that, and I know that that's kind of the how Walmart turned its ship around was getting consumers to shop digitally, enjoy that shopping experience for staples and then increasingly non-staples, and then even get more consumers back into stores because it was providing a better experience in its own stores than it had previously. And so I think that management has the right direction. And so that is the potential upside glimpse is that this new leadership is coming in and can actually kind of start to steer this big ship in that direction to provide the experience of the consumer once. And then one more question about the chart before we get your earnings score, Megan. So that chart, when you have target, really outstripping everyone else, and you know, kind of Kevin Kevin talked about target. It feels like target is in its turnaround time now. Is it just that it's easier comps in that chart when you look at where target is compared to France is where Kroger is?

6:15Yes, I think that's a really big piece of it. Target is coming off of a much lower bar than even Kroger is as we talk about. You know, Kroger has not had the drawdown like we saw target had in years past. And so this is certainly a target turnaround that's taking hold that we're watching here. And Kroger, you know, this looks about right. And I think that, you know, you haven't asked about my earnings score yet, but our earnings score is neutral for this name because the company guided to be about flat. And that's where we see growth and demand is right about flat. So we have this one for us, not necessarily much of an edge because we see demand right about in line with where the stock is trading now. So okay, not much of edge with the number you all signed for your earnings score? Yes, so we're at a seven. So partially, you know, I guess you could say we're cautiously, cautiously bullish, but that's mostly based on the low perceived bar that we're measuring here, not necessarily a robust consumer demand that we're tracking. All right, thank you, Megan. That it's Megan Brantley, vice president of research over at like