Monday, June 19, 2017

Kroger BOMBED [KR]

Pretty easy to see on Thursday that Kroger kind of sucked. They released their last quarters earnings and while they met analysts predictions, they lowered their expectations for the next year. On that news - along with their wishy washy earnings call language - their stock plummeted. Fell off a cliff, if you will. It opened Thursday morning down roughly -13% from the previous days close and it got worse from there. Kroger's management started the earnings call close to 10:00am. The prepared statements in summary were basically not to expect too much from them in 2017 and they readjusted their eps estimates lower from their last ones. In total, KR's share price went from $30.26 down to $24.56 just on Thursday. A grand total of -18.84%.

"What more could go wrong for them this week? They already lost billions of dollars in market cap and are going to make less money this year than previously thought....maybe this is the bottom. Kroger is a value stock that has been struggling lately and, who knows, maybe it's time for me to be contrarian. Everyone thinks it will be bad so I'll buy into it. They could do better than they think! That would give a great boost to their stock price. It's so cheap right now. I think I'll invest!" 

When it rains, it pours. If you missed the big news on Friday, then wow because that was everywhere. I guess Jeff Bezos went grocery shopping at Whole Foods and bought it. Yes. Amazon went and put in a bid to buy Whole Foods on Friday. The offer on the table is $13.7 billion which caused Whole Foods share price to skyrocket - traveling 29% straight up. The best thing for Whole Foods and its shareholders are reports coming out now that there may be a bidding war for WFM. Among those mentioned in a few different articles: Wal-Mart, Albertsons, and unbeknownst to be until 1 minute ago, Kroger. How convenient! The point I was going to make was the wave this offer made throughout the retail/grocery stores. Kroger alone dropped another -9.24% to $22.29 after their already abysmal Thursday.

With this fresh news out about a potential bidding war over Whole Foods a few more interesting talking points come up.

1. If there is such speculation on a bidding war for Whole Foods, maybe buy WFM? Amazon's bid represented a 27% premium which calculated to buying the company for $42 a share. Why then is the price of WFM trading above the offer price at $43.22? The simplest conclusion is other people/institutions/banks believe there will be at least one more bid for the stock at a higher price. Interesting thought.

2. Why would these companies bid against Amazon for Whole Foods? I think first and foremost their thought is that they don't want Amazon to have it. They have already taken away so much from other markets and brick-and-mortar that these potential bidders don't want to see them own another piece of another market. A second reason is to make Amazon pay more for what they want. It's hard to imagine Kroger outbidding Amazon for Whole Foods. Especially after the atrocious earnings announcement and lack of guidance moving forward. Where would that cash come from to spend more than $13.7 billion when their market cap is only $22.77 billion? Compared to Amazon's $464.33 billion, it's peanuts. All told, the main two reasons put forth for going after Whole Foods is so Amazon doesn't have it, or at least to make them pay more than they want for it.

3. Here is my hot take. Maybe this was part of Bezos plan to begin with. While Whole Foods would be great for Amazon, he may be very open to losing the bidding war. Forcing another company who may not even want WFM to bid. Forcing a Wal-Mart or a Kroger to play a hand they don't want to play. They'd be spending billions of their dollars for a company they don't actually want or need. Most acquisitions fail to begin with. Planned and thought out acquisitions where the synergies make sense and cutting costs will save millions. Those fail, or at least don't perform to expectations, more often than not. Maybe Bezos is just trying to force a hand and see what happens.

If I had to guess, Wal-Mart would be the one to come up with a counter-offer. They always seem to be one step behind Amazon and maybe this could be their first victory is taming the beast.

Kroger on the other hand has enough on its plate right now. Trying to regain their composure and steady out. KR should be worried about producing returns to shareholders this year and making sure they make some money. Otherwise there are going to be a whole mess of bigger issues than Amazon buying Whole Foods.


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