Why did Kroger stock fall 12% in September?

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What happened?

Actions of Kroger (NYSE: KR) fell 12.1% in September due to a poorly received earnings report and difficult overall market conditions. Despite analyst estimates and the increase in forecasts, the grocer’s shares fell more than 8% on September 10 after releasing its second quarter results. The S&P 500 The index fell 4.65% during the month as capital exited the stock market, pushing Kroger’s price down even further.

KR total feedback level data by YCharts.

So what?

While Kroger’s sales and earnings impressed, analysts and investors alike were less excited about the company’s profit margin. Grocery stores operate with narrow gross margins, and minor disruptions can have major impacts on the bottom line. Kroger’s gross margin was 21.4% last quarter, up from 22.8% last year. The company cited pricing pressure, merchandising expenses and supply chain disruptions as factors contributing to squeezing margins.

Grocery worker riding on a cart in a store.

Image source: Getty Images

As we’ve seen with so many other companies this quarter, inflation creates uncertainty. These issues seem unlikely to be resolved overnight, so investors view the future with skepticism. Kroger specifically mentioned a slight increase in customer volume as some consumers are sourcing in response to the increase in COVID-19 cases, which should really have a temporary impact for the grocer. If sales decline over the next few quarters while pricing issues persist, financial results will be at risk.

And now?

Kroger’s long-term outlook remains unchanged, but investors should reflect on the current challenges facing the stock, as well as its valuation. These supply chain issues should eventually be resolved, but that will take until 2022 at the earliest. It will also take some time for retailers and grocers to fully understand this year’s input price changes. Grocers are very competitive, so they need to know what higher input prices can be passed on to consumers. This makes the next few quarters uncertain for Kroger.

Its forward P / E ratio is 12.1, which is in the middle of its historical range and roughly comparable to its peer group. The stock’s enterprise value / EBITDA ratio is quite high at 8.67, and its 2.1% dividend yield looks pretty average compared to other dividend-paying stocks. Despite falling over 12% this month, Kroger stock hasn’t gotten insanely cheap. This stock is suitable for investors looking for more defensive positions in their portfolio or for long-term income investors. In any case, shareholders should not be shocked by the volatility associated with short-term inflationary pressures.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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