Kroger Co (NYSE:KR) shares have been strong performers in the past year, and one analyst said Wednesday the stock is set up well for another solid year in 2022, though there are some headwinds it will face.
The Analyst: Bank of America analyst Robert Ohmes upgraded Kroger from Underperform to Neutral and raised his price target from $38 to $52.
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The Thesis: In the upgrade note, Ohmes said large food retailers will likely continue to gain market share from smaller competitors in 2022, a potential tailwind for Kroger.
"While we continue to see challenges for KR in 2022 (both sales/traffic and margins), we believe KR’s scale and strong digital/omni-channel capabilities position it more favorably vs. smaller Food Retail peers in 2022 and beyond, and which supports valuation," he said.
The shift in consumer preferences to the convenience that began during the pandemic will continue, which is good news for Kroger and other food retailers that have been investing in digital and omnichannel initiatives. Ohmes is particularly bullish on Kroger's Boost by KR Plus delivery subscription, which he says will drive both increasing digital engagement and market share gains.
Unfortunately, Ohmes said Kroger's valuation upside will likely remain limited as long as Kroger's store traffic growth remains negative. In addition, he said elevated inflation levels could drive Kroger customers to more heavily discounted competitors. A tight labor market and supply chain disruptions will also spill over into 2022, while costs associated with Ocado investments continue to pressure margins, Ohmes said. He said pharmacy margins from COVID-19 vaccinations should continue to offset these overall margin pressures, at least into early 2022.
Benzinga's Take: Kroger has made tremendous strides in building its digital offerings and gaining market share from smaller competitors. However, it is difficult for Kroger to compete on foot traffic with Walmart Inc (NYSE:WMT) and other deep discount retailers in an environment of skyrocketing grocery prices.
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