Option Trade 
Kroger Co (NYSE:KR) Calls
Wednesday, September 09, 2015

**OPTION TRADE: Buy the KR Jan 2016 35.000 call (KR160115C00035000) at approximately $2.40. Place a protective stop loss at $0.95, and a pre-determined sell at $4.50.

by Ian Harvey

September 09, 2015


Kroger Co (NYSE: KR), an operator of retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States, is scheduled to report its second-quarter results on September 11. The company will release the results before the market open with analysts forecasting earnings of $0.40 per share on revenue of $25.46 billion. The stock has risen 7.9% on the year.

Kroger had great value right now with a P/E of just 18.7 and analysts forecasting 10% earnings growth in 2017 versus 2016. The sector as a whole trades with an average P/E of 22.7, so KR looks oversold right now. The stock has been trending lower with the overall market, but an upbeat earnings report should bring momentum back into the stock, and it is believed that KR will be one of the stocks that bounce the quickest once stability returns to the market. On a split-adjusted basis, the company earned 35 cents per share last year during the second-quarter, so if it can hit the consensus for this year's report it would translate to year over year earnings growth of 11.4%, expect to see shares bounce nicely.

Technical Details

Kroger has a 12 month low of $25.42 and a 12 month high of $39.43. The firm has a market cap of $34.05 billion and a price-to-earnings ratio of 18.92. The company’s 50-day moving average is $37.08 and its 200 day moving average is $36.87.


Previous Earnings

Kroger last posted its quarterly earnings data on Thursday, June 18th. The company reported $1.25 earnings per share (EPS) for the quarter, topping the analysts’ consensus estimate of $1.22 by $0.03. The company had revenue of $33.10 billion for the quarter, compared to the consensus estimate of $33.42 billion. The business’s revenue was up .3% on a year-over-year basis.

During the same period in the prior year, the firm posted $1.09 earnings per share. On average, equities analysts anticipate that Kroger will post $1.96 EPS for the current year.

Future Earnings

Despite the first-quarter profit beat, Kroger in June left its 2015 earnings guidance unchanged. Profit is still expected to rise by about 12% to $3.85 per share. But that conservatism has more to do with falling gasoline margins than any soft retailing results. That's clear from the fact that Kroger boosted its sales growth outlook for the year by 0.5 percentage points (comps are now forecast to hit 4% for 2015).

Positive Factors

Kroger generated $1.8 billion of operating cash last quarter, or $61 million more than it produced in the prior year period. That growing cash flow has allowed management to quickly pay down the debt it took on for its 2012 acquisition of Harris Teeter -- while still spending heavily on stock buybacks and dividend raises. Share repurchase spending was $1.1 billion in the last 12 months, including almost $600 million last quarter. Kroger also in July hiked its dividend by 14%.

Another big benefit of cash flow growth is that it gives Kroger more flexibility to go after expensive acquisitions like Harris Teeter -- without loading up the balance sheet with crippling debt. In fact, the company just reached its target leverage ratio six months ahead of schedule. That achievement suggests larger grocery store mergers might be in the cards over the next few years.

Kroger Inc has separated itself from its grocery store rivals during the past few years because of one big reason -- it continues to innovate. As organics became more popular, the company made a canny move into the segment with its Simple Truth line, which has since grown to be a billion-dollar brand.

The parent of brands like King Sooper's and Ralph's has also scored by revamping its coffee selection and offering more prepared foods. For instance, the company is now the nation's largest retailer of sushi.

Additionally, Kroger has stepped up its e-commerce efforts, offering in-store pickup at 160 Harris Teeter stores. For all those reasons outlined in its customer-first strategy, the company has gained market share for 11 years straight, and has seen comparable sales increase in each of the last 46 quarters.

Now, Kroger is making yet another bold move, stepping up its service of craft beer. Kroger is adding beer stations in its stores in the Cincinnati market, and has big plans to expand a program it actually started back in 2003, to better compete with Wal-Mart . Customers at the newly added stores will be able to purchase or refill growlers at the store, and Kroger will offer tastings and other such events and promotions.

Wine will also be available alongside the beer taps.

There's another element in Kroger's favor, as well, as it rolls in out the growler program. Craft beer drinkers tend be wealthier than the national average, with Neilsen reporting that 59% have annual incomes of $75,000 or more. This makes it an attractive market for Kroger to tap into.

Analysts Opinions

Kroger was downgraded by analysts at Vetr from a “strong-buy” rating to a “buy” rating in a report released on Tuesday. They currently have a $38.73 target price on the stock. Vetr‘s price objective would suggest a potential upside of 10.50% from the stock’s previous close.

The company has also been the subject of a number of other research reports:-

• Zacks upgraded shares of Kroger from a “hold” rating to a “buy” rating and set a $40.50 price target on the stock in a research report on Tuesday, June 30th.

• Guggenheim reissued a “buy” rating and set a $41.00 price objective on shares of Kroger in a research note on Thursday, July 2nd.

• Barclays decreased their target price on shares of Kroger to $38.00 and set an “equal weight” rating for the company in a research note on Thursday, September 3rd.

• Jefferies Group restated a “hold” rating and issued a $38.50 price target on shares of Kroger in a research note on Wednesday, June 17th.

• Finally, Macquarie started coverage on Kroger in a research note on Tuesday, June 9th. They issued a “neutral” rating and a $32.50 target price on the stock.

Eight research analysts have rated the stock with a hold rating and ten have assigned a buy rating to the company. The company currently has an average rating of “Buy” and an average price target of $39.01.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the KR Jan 2016 35.000 call (KR160115C00035000) at approximately $2.40. Place a protective stop loss at $0.95, and a pre-determined sell at $4.50.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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