UBS: Here’s how Kroger can survive Amazon’s push into groceries (KR)

Shares of Kroger, the No. 2 US grocery chain, tanked last week after the company said it would only give annual — not long term — guidance going forward.

For the second quarter, Kroger's same stores sales (excluding fuel) and total revenue both beat analyst expectations, but the guidance shift left UBS analysts Michael Lasser and Mark Carden feeling un-enthused.

“Had it not been for the fact that KR left some doubt about its long-term outlook, its 2Q wouldhavebeenreceivedrelativelywell,” they wrote in a note out Monday morning. “Overall,wethinkKRshowedsomesignsof progress this quarter.

All grocers are worried after Amazon’s $13.7 billion acquisition of Whole Foods led to a 25% jump in shoppers after the internet giant dramatically slashed prices at Whole Foods last month, Foursquare Labs data showed.

UBS maintained both its neutral rating for Kroger shares and its $24 price target, and offered two categories where Kroger can fend off any further declines:

Private label

Americans are giving up on brand-name products, pitting retailers and brands in a heated fight with one anther. Barclays called this shift a “sphere of despair,” in a note out in May. UBS says Kroger should double down on its private label offerings.

"One way KR expects to compete more effectively is by increasing its presence in private label," writes the bank. "Here,thecompany'sbest-in-classdataanalyticsoperation&thirdpartyblind tastetestscanhelpgiveitanedgeontrackingwhichproductsbestresonateswith consumers."

Whole Foods isn’t the only digitally fueled grocery empire. Walmart’s acquisitions of online stores like Jet.com, Modcloth and Bonobos last year has led to a 60% uptick in online sales last quarter. Kroger has plenty of ground to make up in this online frontier.

"KR continues to quietly grow its own omnichannel offering. Notably, its digital sales grew by 126% YoY in 2Q," writes UBS. "Further, KR plans to grow the number of stores offering ClickList to 1k by year end from 813 today.

"When combined with its packaged delivery offering on Vitacost and its growing use of third party delivery networks such as Uber & Shipt, we think the retailer is taking prudent steps to remain relevant in this growing channel."

Shares of Kroger were trading up about 1% Monday morning, after falling 8% in response to Friday’s disappointing earnings.

Kroger's CFO recognized that the retail environment is facing tough times. In an interview with CNBC, he said the company "decided in this environment, as fast changing as it is, we’re better off trying to give annual guidance."

Kroger shares have fallen 31% over the past year.