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Investment

Kroger CEO says Whole Foods is a 'good fit' for Amazon; Kroger's stock pops

Kroger CEO Rodney McMullen acknowledged that the grocery industry is changing rapidly, and he’s touting his company’s ability to adapt.

In the wake of Amazon’s plan to acquire Whole Foods, some have speculated that the pace of change will only accelerate in the sector. Some have even suggested Kroger should make a counteroffer for the organic grocery chain to protect its interest from Amazon’s push into the space and the disruption that will likely follow.

When pressed to weigh in on the deal, McMullen said Whole Foods is a “good fit” for Amazon.

“The [Amazon-Whole Foods] deal didn’t surprise me,” McMullen said in a rare, exclusive interview with CNBC’s “Squawk on the Street” on Tuesday. “I think the retail industry is in constant change. We’ve been saying that for years.”

“Amazon wanted to do something from the physical asset standpoint,” McMullen added. “We are trying to take care of customers.”

Kroger’s stock popped about 2.5 percent on the heels of McMullen’s interview, suggesting some investors would not support Kroger launching into a protracted bidding war with the deep-pocketed Amazon. The shares have since given back those gains and were up 1.5 percent at midday.

“My takeaway is simply this interview invokes confidence that Kroger is still very competitive in the space … and [Kroger’s] $16 billion in natural and organic sales is larger than the entire Whole Food chain’s revenue,” Morningstar’s John Brick told CNBC.

“This is on the back of their CFO … saying they are ready for Aldi and Lidl to expand, as [Kroger] has been preparing for it,” Brick added.

Meanwhile, shares of Whole Foods have trimmed back their gains, now hovering only slightly above Amazon’s $42 bid price. Whole Foods’ stock surged past Amazon’s offer price almost immediately after the deal was announced because investors speculated that a sweeter offer would be made. In recent days, the gap between Whole Foods’ stock price and Amazon’s offer have narrowed, as a rival bid has yet to surface.

Out of all the grocery stocks, Kroger took an especially heavy beating following Amazon’s news, but McMullen doesn’t seem concerned or feel threatened enough to change his company’s strategy.

Instead, Kroger is remaining laser focused on the long term — the next three to five years — he said.

“I tell our investors we look at any potential opportunities,” McMullen told CNBC. The CEO said he feels “great” about Kroger’s financial flexibility, as the grocer continues to grow its operations.

He added that he doesn’t feel constrained by the debt on Kroger’s balance sheet, which has been a concern for some analysts who cover the chain.

Still, as of Monday’s close, Kroger’s stock is down 24 percent for the month and has fallen about 35 percent in 2017.

“I am finding that many investors are trying to separate the perception of what may come in the next few years from the underlying fundamentals of the retail stocks to see if there are opportunities,” Joe Feldman, a retail analyst at Telsey Advisory Group, told CNBC.

For example, Costco seems to have been hit “too hard” lately, too, Feldman said.

In addition to the pressure from the Amazon deal, Kroger’s stock has also taken a hit from the pressure it’s under as food prices drop and competition in the sector ratchets up. Hurt by these trends, Kroger recently trimmed its earnings forecast.

“Anytime you’re transitioning the environment is harder,” McMullen said. “We’re definitely up for all challenges. … We’ve been through many changes.”

Source: Investment Cnbc
Kroger CEO says Whole Foods is a 'good fit' for Amazon; Kroger's stock pops

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