Analyst urges investors to 'buy on weakness' as Kroger shares plunge

  • Shares of supermarket company Kroger plunged nearly 19 percent Thursday, following mixed results of deflation and inflation experienced by the company.
  • Analyst Rupesh Parikh urged investors to keep "buying the weakness" and stay optimistic for long-term gains.

Kroger shareholders should stay optimistic for long-term gains, despite the company's nearly 19 percent plunge in shares by market close, said Rupesh Parikh, senior analyst at Oppenheimer Holdings.

"The environment is challenging, but the management team here is making the necessary price investments to improve their competitive positioning," Parikh said in an interview Thursday on CNBC's "Power Lunch." "Near term the headwinds persist, but we think longer term, these price investments will lead to market share gains. "

Although the company reported earnings that met estimates in the first quarter, same-store sales fell for two consecutive quarters for the first time in seven years. Kroger reported it will cut its full-year EPS to a range of $2 to $2.05 per share, compared to its previous estimate of $2.21 to $2.25. Analysts were expecting $2.49 per share, according to a consensus estimate from Thomson Reuters.

A woman checks a mobile phone while shopping at a Kroger grocery store in Birmingham, Mich.
Sean Proctor | Bloomberg | Getty Images
A woman checks a mobile phone while shopping at a Kroger grocery store in Birmingham, Mich.

When asked if he is worried about being "too early" in remaining bullish to "keep buying into this weakness," Parikh said that while the market may be risky at the moment, long-term rewards could be awaiting in the future.

"I think right now the stock is very much a show-me story," Parikh said, adding that he doesn't see the company's shares bouncing back in the near term. "So I think if you're a longer term shareholder, I would buy the weakness today."

Kroger CFO Mike Schlotman told CNBC on Thursday that the company's rocky profit outlook was due to a mix of deflation and inflation. While there was deflation in food prices and tighter competition in the grocery industry, categories such as produce were inflationary over the quarter, according to Schlotman.

"Anytime you're in the transition period, whether going from inflation to deflation, or deflation back to inflation, it just takes a while for all those nuances to find their way to the shelf edge," Schlotman said earlier Thursday on "Squawk Box." "So that makes it a little bit choppy in the short run."

Parikh also took note of the impact of Kroger's shares on other grocery industry competitors, foreseeing other chains like Whole Foods experiencing a similar bounce-back.

"Shares are down almost 7 percent right now, but we think the Whole Foods management team has potential to turn around the business," Parikh said. "So we think Whole Foods could rally back up to the $40 level over the next few quarters."

—CNBC's Berkeley Lovelace Jr. contributed to this report.