BUY HOLD SELL A+ A A- B+ B B- C+ C C- D+ D D- E+ E E- F HOLD December 10, 2017 HOLD RATING SINCE 06/16/2017 BUSINESS DESCRIPTION The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. STOCK PERFORMANCE (%) 3 Mo. 1 Yr. 3 Yr (Ann) Price Change 16.51-21.12-4.53 GROWTH (%) Last Qtr 12 Mo. 3 Yr CAGR Revenues 4.48 4.69 3.84 Net Income 1.79-23.13-1.52 EPS 7.31-19.62 1.43 RETURN ON EQUITY (%) Ind Avg S&P 500 Q3 2017 25.10 18.52 13.41 Q3 2016 30.67 18.26 11.79 Q3 2015 31.86 18.44 12.91 Sector: Consumer Non-Discretionary Sub-Industry: Food Retail Source: S&P Weekly Price: (US$) SMA (50) SMA (100) 1 Year 2 Years Rating History BUY Volume in Millions 2016 2017 COMPUSTAT for Price and Volume, TheStreet Ratings, Inc. for Rating History HOLD 43 40 38 35 33 30 28 25 23 20 250 0 P/E COMPARISON RECOMMENDATION We rate () a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing nesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth and attractive valuation levels. However, as a counter to these strengths, we also find nesses including generally higher debt management risk, operating cash flow and a generally disappointing performance in the stock itself. 15.79 24.32 Ind Avg 25.35 S&P 500 HIGHLIGHTS The net income growth from the same quarter one year ago has significantly exceeded that of the Food & Staples Retailing industry average, but is less than that of the S&P 500. The net income increased by 1.8% when compared to the same quarter one year prior, going from $390.00 million to $397.00 million. EPS ANALYSIS¹ ($) Despite its growing revenue, the company underperformed as compared with the industry average of 13.9%. Since the same quarter one year prior, revenues slightly increased by 4.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share. Q1 0.63 Q2 0.44 Q3 0.43 2015 Q4 0.57 Q1 0.71 Q2 0.40 Q3 0.41 2016 NA = not available NM = not meaningful Q4 0.53 Q1 0.32 Q2 0.39 Q3 0.44 2017 1 Compustat fiscal year convention is used for all fundamental data items. The debt-to-equity ratio is very high at 2.39 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with this, the company manages to maintain a quick ratio of 0.23, which clearly demonstrates the inability to cover short-term cash needs. Net operating cash flow has significantly decreased to -$271.00 million or 163.91% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower. PAGE 1
PEER GROUP ANALYSIS REVENUE GROWTH AND EBITDA MARGIN* Revenue Growth (TTM) -10% 20% UNFAVORABLE 1% SVU WMK SFS VLGEA ANDE EBITDA Margin (TTM) CBD FAVORABLE SFM CASY IMKTA Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates. Companies for this scatter plot have a market capitalization between $190.4 Million and $23.6 Billion. Companies with NA or NM values do not appear. *EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. REVENUE GROWTH AND EARNINGS YIELD Revenue Growth (TTM) -10% 20% UNFAVORABLE -4% SVU ANDE Earnings Yield (TTM) CASY SFS CBD FAVORABLE SFM NGVC VLGEA 8% WMK IMKTA Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. Companies for this scatter plot have revenue growth rates between -5% and 19.1%. Companies with NA or NM values do not appear. 8% INDUSTRY ANALYSIS Food and staples retailing is the second largest segment of the consumer staples industry and includes wholesale food distribution, grocery retaining, specialty food stores, and drugstores. Major players are Wal-Mart Stores (WMT), CVS Health (CVS), Walgreens Boots Alliance (WBA), Sysco (SYY), Kroger (), Supervalu (SVU), Andersons (ANDE), and Whole Foods Market (WFM), all of which possess unique operational models. The industry is defensive and characterized by stable growth. Food distributors maintain a specific product mix. Grocery stores are usually locally owned and have a fixed client base. They record average annual revenue of $14 million. Supermarkets rely on a distribution network to survive as they do not have enough space to store goods. Specialty stores use merchandising to attract foot traffic. Drugstores focus on prescription customers and sell over-the-counter (OTC) drugs, health and beauty aids, greeting cards, photo-finishing services, and general merchandise. Demand for basic products remains stable regardless of economic conditions. Commodity pricing pressures are being offset by corporate restructurings, which are helping to maintain margins. During periods of growth, the industry tends to outperform. The Food and Drug Administration (FDA) is the regulatory body for food manufacturers and drug retailers. Regulation begins at the initial phases of development and continues through the manufacturing phase and down the supply chain. Law makers are considering legislation to prohibit Canadian pharmacies from selling prescription drugs to US mail-order customers in order to help domestic pharmacies. Prescription drugs account for approximately 10% of the total US medical bill. Also, Medicare favors generic drugs and in doing so influences industry participants. In the past recession, consumer preference shifted towards cost-effective choices such as discount groceries. Premium organic options benefit from the improved economic climate. Lifestyle drugs have been hit hardest. However, baby boomers are now propelling growth in the drugstore segment, which is expected to expand within the consumer staples industry. Increased pharmacy traffic is not necessarily a profit driver, but it triggers impulse purchase of general merchandise and services. The industry s dependable revenue and low beta are commendable during an economic recession, but two factors will curtail long-run performance, rising raw material costs and high valuations. Food and staples retailing remains a stable business, but demand for food products is limited by the small annual US population growth. PEER GROUP: Food & Staples Retailing Recent Market Price/ Net Sales Net Income Ticker Company Name Price ($) Cap ($M) Earnings TTM ($M) TTM ($M) 26.53 23,599 15.79 119,242.00 1,559.00 ANDE ANDERSONS INC 32.30 916 NM 3,795.33-17.06 SVU SUPERVALU INC 18.91 726 NM 13,714.00 559.00 SFS SMART & FINAL STORES INC 8.75 641 87.50 4,503.29 7.39 CASY CASEYS GENERAL STORES INC 123.67 4,687 29.17 7,630.25 166.85 IMKTA INGLES MARKETS INC 30.55 431 12.73 3,875.68 48.69 CBD CIA BRASILEIRA DE DISTRIB 22.56 3,763 70.50 13,734.75-94.55 SFM SPROUTS FARMERS MARKET 23.79 3,166 24.53 4,506.38 135.75 VLGEA VILLAGE SUPER MARKET 23.41 236 15.50 1,601.36 21.83 NGVC NATURAL GROCERS VITAMIN CTGE 8.48 190 27.35 769.03 6.89 WMK WEIS MARKETS INC 41.47 1,115 14.76 3,508.16 75.90 The peer group comparison is based on Major Food Retail companies of comparable size. PAGE 2
COMPANY DESCRIPTION The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of October 26, 2017, the company operated 2,793 retail food stores, including 1,472 supermarket fuel centers; 783 convenience stores; 2,258 pharmacies; 222 retail health clinics; and 307 fine jewelry stores, as well as an online retail store. The Kroger Co. was founded in 1883 and is headquartered in Cincinnati, Ohio. 1014 Vine Street Cincinnati, OH 45202 USA Phone: 513-762-4000 http://www.thekrogerco.com STOCK-AT-A-GLANCE Below is a summary of the major fundamental and technical factors we consider when determining our overall recommendation of shares. It is provided in order to give you a deeper understanding of our rating methodology as well as to paint a more complete picture of a stock's strengths and nesses. It is important to note, however, that these factors only tell part of the story. To gain an even more comprehensive understanding of our stance on the stock, these factors must be assessed in combination with the stock s valuation. Please refer to our Valuation section on page 5 for further information. FACTOR SCORE Growth 3.0 out of 5 stars Measures the growth of both the company's income statement and cash flow. On this factor, has a growth score better than 50% of the stocks we rate. Total Return 1.5 out of 5 stars Measures the historical price movement of the stock. The stock performance of this company has beaten 20% of the companies we cover. Efficiency 4.5 out of 5 stars Measures the strength and historic growth of a company's return on invested capital. The company has generated more income per dollar of capital than 80% of the companies we review. Price volatility 1.5 out of 5 stars Measures the volatility of the company's stock price historically. The stock is less volatile than 20% of the stocks we monitor. Solvency 4.5 out of 5 stars Measures the solvency of the company based on several ratios. The company is more solvent than 80% of the companies we analyze. Income 4.0 out of 5 stars Measures dividend yield and payouts to shareholders. The company's dividend is higher than 70% of the companies we track. THESTREET RATINGS RESEARCH METHODOLOGY TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's performance. These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. PAGE 3
Consensus EPS Estimates² ($) IBES consensus estimates are provided by Thomson Financial FINANCIAL ANALYSIS 's gross profit margin for the third quarter of its fiscal year 2017 is essentially unchanged when compared to the same period a year ago. The company has grown its sales and net income during the past quarter when compared with the same quarter a year ago, and although its growth in net income has outpaced the industry average, its revenue growth has not. has very liquidity. Currently, the Quick Ratio is 0.23 which clearly shows a lack of ability to cover short-term cash needs. The company's liquidity has increased from the same period last year. 0.61 Q4 FY18 2.02 E 2018(E) 1.98 E 2019(E) During the same period, stockholders' equity ("net worth") has decreased by 6.06% from the same quarter last year. The key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the near future. INCOME STATEMENT Net Sales ($mil) 27,749.00 26,557.00 EBITDA ($mil) 1,313.00 1,262.00 EBIT ($mil) 741.00 713.00 Net Income ($mil) 397.00 390.00 STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12-months. To learn more visit www.thestreetratings.com. BALANCE SHEET Cash & Equiv. ($mil) 1,515.00 1,417.00 Total Assets ($mil) 37,028.00 36,507.00 Total Debt ($mil) 14,847.00 13,836.00 Equity ($mil) 6,211.00 6,612.00 PROFITABILITY Gross Profit Margin 22.40% 22.23% EBITDA Margin 4.73% 4.75% Operating Margin 2.67% 2.68% Sales Turnover 3.22 3.12 Return on Assets 4.21% 5.55% Return on Equity 25.10% 30.67% DEBT Current Ratio 0.85 0.74 Debt/Capital 0.71 0.68 Interest Expense 138.00 125.00 Interest Coverage 5.37 5.70 SHARE DATA Shares outstanding (mil) 881 934 Div / share 0.13 0.12 EPS 0.44 0.41 Book value / share 7.05 7.08 Institutional Own % NA NA Avg Daily Volume 15,966,479 16,082,393 2 Sum of quarterly figures may not match annual estimates due to use of median consensus estimates. PAGE 4
RATINGS HISTORY Our rating for has not changed since 6/16/2017. As of 12/7/2017, the stock was trading at a price of which is 27.2% below its 52-week high of $36.44 and 34.7% above its 52-week low of $19.69. 2 Year Chart BUY: $41.43 2016 HOLD: $22.29 $50 $40 $30 MOST RECENT RATINGS CHANGES Date Price Action From To 6/16/17 $22.29 Downgrade Buy Hold 12/7/15 $41.43 No Change Buy Buy Price reflects the closing price as of the date listed, if available RATINGS DEFINITIONS & DISTRIBUTION OF THESTREET RATINGS (as of 12/7/2017) 45.41% Buy - We believe that this stock has the opportunity to appreciate and produce a total return of more than 10% over the next 12 months. 30.81% Hold - We do not believe this stock offers conclusive evidence to warrant the purchase or sale of shares at this time and that its likelihood of positive total return is roughly in balance with the risk of loss. 23.78% Sell - We believe that this stock is likely to decline by more than 10% over the next 12 months, with the risk involved too great to compensate for any possible returns. TheStreet Ratings 14 Wall Street, 15th Floor New York, NY 10005 www.thestreet.com Research Contact: 212-321-5381 Sales Contact: 866-321-8726 VALUATION HOLD. This stock's P/E ratio indicates a discount compared to an average of 24.32 for the Food & Staples Retailing industry and a discount compared to the S&P 500 average of 25.35. To use another comparison, its price-to-book ratio of 3.76 indicates a premium versus the S&P 500 average of 3.22 and a discount versus the industry average of 4.44. The current price-to-sales ratio is well below the S&P 500 average and is also below the industry average, indicating a discount. Upon assessment of these and other key valuation criteria, proves to trade at a discount to investment alternatives within the industry. Price/Earnings 15.79 Peers 24.32 Discount. A lower P/E ratio than its peers can signify a less expensive stock or lower growth expectations. is trading at a significant discount to its peers. Price/Projected Earnings 13.40 Peers 20.34 Discount. A lower price-to-projected earnings ratio than its peers can signify a less expensive stock or lower future growth expectations. is trading at a significant discount to its peers. Price/Book 3.76 Peers 4.44 Discount. A lower price-to-book ratio makes a stock more attractive to investors seeking stocks with lower market values per dollar of equity on the balance sheet. is trading at a discount to its peers. Price/Sales 0.20 Peers 0.54 Discount. In the absence of P/E and P/B multiples, the price-to-sales ratio can display the value investors are placing on each dollar of sales. is trading at a significant discount to its industry on this measurement. DISCLAIMER: Price/CashFlow 6.04 Peers 10.09 Discount. The P/CF ratio, a stock s price divided by the company's cash flow from operations, is useful for comparing companies with different capital requirements or financing structures. is trading at a significant discount to its peers. Price to Earnings/Growth NM Peers 15.45 Neutral. The PEG ratio is the stock s P/E divided by the consensus estimate of long-term earnings growth. Faster growth can justify higher price multiples. 's negative PEG ratio makes this valuation measure meaningless. Earnings Growth lower higher -19.62 Peers 3.11 Lower. Elevated earnings growth rates can lead to capital appreciation and justify higher price-to-earnings ratios. However, is expected to significantly trail its peers on the basis of its earnings growth rate. Sales Growth lower higher 4.69 Peers 3.89 Higher. A sales growth rate that exceeds the industry implies that a company is gaining market share. has a sales growth rate that exceeds its peers. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but TheStreet Ratings cannot guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided via the COMPUSTAT Xpressfeed product from Standard &Poor's, a division of The McGraw-Hill Companies, Inc., as well as other third-party data providers. TheStreet Ratings is a division of TheStreet, Inc., which is a publisher. This research report contains opinions and is provided for informational purposes only. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in this report constitutes, or is intended to constitute a recommendation by TheStreet Ratings of any particular security or trading strategy or a determination by TheStreet Ratings that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Your use of this report is governed by TheStreet, Inc.'s Terms of Use found at http://www.thestreet.com/static/about/terms-of-use.html. PAGE 5