Citi downgrades Kroger to sell as inflation and fewer vaccines are expected to hurt margins
Investors should stay away from Kroger in the upcoming year as the retailer's profit margin is under pressure on several fronts, according to Citi. Analyst Paul Lejuez downgraded Kroger's stock to sell from neutral, saying in a note to clients Friday that the food retailer should not be seen as a defensive play for investors looking to hide out form market volatility. "KR has been viewed as a defensive name within retail. However, we don't believe this reflects the risks KR faces in [2022] and beyond," Lejuez wrote. Some of those risks include the difficulty of passing food inflation on to customers and the normalization of food consumption as the economy continues to recover from the pandemic. Additionally, Kroger could struggle to top last year's results without the benefit of distributing 10 million Covid vaccines. "We estimate the average revenue/shot is $28-$40 (Medicare reimburses at $40/shot). And there is no cost for the vaccine so the incremental cost to the pharmacy is [additional] staffing (as needed) and gloves/swabs etc. Therefore, we believe the EBIT margin is likely very high (70- 90%) on vaccines," the note said. Citi cut its price target on Kroger to $42 per share from $47. The new target is more than 7% below where the stock closed Thursday. Shares fell 2.5% in premarket trading Friday. The stock is currently up less than 1% for year, making it a major relative outperformer after a rough start to the year for the market. Citi is not the only Wall Street firm to sour on Kroger recently. Wells Fargo downgraded the stock to underweight Tuesday . -CNBC's Michael Bloom contributed to this report.

An employee pushes grocery carts outside a Kroger Co. grocery store in Louisville, Kentucky. Luke Sharrett | Bloomberg | Getty Images