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Kroger downgraded to Bank of America as competition with Walmart increases target

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Kroger Co. was demoted to neutral on buying from Bank of America, with analysts citing increased competition with other mass grocers.

Bank of America has moved its price target from $ 42 to $ 40.

Grocers have seen sales skyrocket during the coronavirus pandemic as more customers, who work, study and spend more time at home, prepare more of their own meals.

Big box chains like Walmart Inc. WMT,
+ 0.45%
and Target Corp. TGT,
+ 0.53%
have also taken advantage of increased consumer attention to focus on customer service services and offerings that attract shoppers who want to stock their pantry while taking social distancing.

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Walmart, for example, has announced the upcoming launch of Walmart +, its membership program that will offer unlimited shipping. And Target, which was already using its stores as distribution centers, spoke about customer response to its pickup service and other options.

Kroger KR,
-4.45%
has invested heavily in its digital offerings, for example, through a partnership with Ocado, a UK online grocery company. It announced plans to strengthen its e-commerce lineup with the addition of 50,000 items from third-party sellers.

We believe Krogers plans to integrate third-party market offerings this fall reflects Krogers’ need for a broader assortment of general merchandise to compete with omnichannel leaders Walmart and Target, wrote Bank of America analysts led by Robert. Ohmes.

A History of the Wall Street Journal published just before Krogers ‘earnings announcement discussed Krogers’ digital shortcomings despite its efforts and investments, saying the grocer was in catch-up mode in e-commerce.

Raymond James analysts, in a note released last week, point to the skyrocketing growth of online grocery shopping during the coronavirus, with Walmart, Target and Amazon.com Inc. AMZN,
-0.42%
among the winners. Food and beverage is more than $ 800 billion in business in the United States, and Raymond James expects online grocery penetration in the United States to reach around 6% this year, doubling the last year, with sales of $ 50 billion. Analysts say the forecast could be cautious.

See: Target to increase the number of black workers in the company by 20% over the next three years

Analysts believe that online grocery shopping may reach around 10% by 2025.

We believe traditional grocers have the most to lose, although many are also increasingly investing in online grocery capabilities, including automation, and would note that Instacart is a key technology partner for many traditional grocers. , wrote Raymond James.

BMO Capital Markets analysts led by Kelly Bania said the popularity of online in-store picking should also help.

Kroger noted that digital profitability is gradually improving, we largely believe in the pickup business, despite the temporary removal of pickup fees, BMO said.

BMO evaluates the performance of the Kroger Stock Market with a target price of $ 34.

But Bank of America believes identical sales are expected to slow as more customers return to restaurants. Kroger reported a 14.6% increase in identical non-fuel sales in the most recent quarter and expects growth for the year to exceed 13%.

UBS analysts look to the year ahead when conditions moderate.

[W]Much of the attention will now be on Kroger’s performance in a likely more normalized environment in 2021, when comparisons are difficult, according to UBS analysts led by Michael Lasser.

In the meantime, Kroger’s inventory is suffering as other grocery retailers, including traditional stores like Albertsons Cos. Inc. ACI,
-3.60%,
performed better quarterly, analysts said.

Kroger’s shares have fallen 7.2% over the past month, although they have jumped 13.3% for the year to date. The S&P 500 SPX index,
+ 1.27%
is up 4.7% for 2020 so far.

It may be that Kroger has invested more in pricing than others, or that it just hasn’t captured growth like other players, UBS said. Either way, we believe Kroger will continue to benefit from favorable industry winds and see strength throughout the year.

Don’t miss: COVID-Linked U.S. Ecommerce Growth Slows As Store Reopens Attract Quarantine-Tired Customers: Adobe

UBS is pricing Kroger stock neutral with a price target of $ 36, up $ 1.

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