The Ratings Game: Kroger paid too much for meal kit company Home Chef, analysts say

With a price tag that could reach $700 million, Kroger Co. overpaid for meal-kit company Home Chef, UBS analysts wrote in a Friday note.

The deal, announced in May, called for $200 million initially and up to $700 million when Home Chef reaches performance targets. Home Chef was the largest private meal-kit company in the U.S., according to The Wall Street Journal.

“Customers want convenience, simplicity and a personalized food experience,” said Kroger KR, +3.34%   Chief Executive W. Rodney McMullen on the Thursday earnings call. “Our planned merger with Home Chef will accelerate our ability to deliver exactly this.”

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UBS analysts highlight that Kroger is using the deal to bring other benefits to the organization. For instance, Home Chef will take the reins for the company’s digital and in-store meal kit operations.

“Still we struggle to see enough of a net benefit to justify the $700 million potential acquisition cost, when including earn-outs,” they said.

UBS rates Kroger shares neutral with a $29 price target, up from $26.

GlobalData Retail doesn’t address the price issue, but says it’s “more optimistic” about the deal than they are about the Ocado deal, which was also announced in May. Kroger took a 5% stake in the British company at a value of about $247 million.

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“The meal-kit market is growing rapidly and is taking share from both CPG [consumer packaged goods] firms and supermarkets,” wrote Neil Saunders, managing director at GlobalData. “Kroger needed a response to that, and Home Chef is a good choice from a brand and commercial perspective.”

Kroger reported first-quarter earnings that beat expectations, including gains from the sale of the convenience store business.

The results sent shares soaring, and the stock is up nearly 15% for the week.

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Still, BMO analysts note that the 1.4% same-store sales growth excluding fuel was in line with its analysis, “suggesting that market share trends have not improved despite the investments in labor and price that began last year.”

Analysts led by Kelly Bania expect continued volatility “and guidance suggests that the next few quarters could be much weaker as investments ramp up through the year.”

BMO rates Kroger shares market perform and raised its price target $1 to $28.

Kroger shares are up 8.2% for the year so far while the S&P 500 index is up 3% for the period.

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