With a $33.84 billion market cap, The Kroger Co. (KR - Get Rating) is a grocery retailer that operates combination food and drug stores, marketplace stores, multi-department stores, and price impact warehouses. The company operates more than 2,725 supermarkets in 35 states and the District of Columbia.

Rodney McMullen, KR’s Chairman and CEO commented, “Kroger delivered strong second-quarter results propelled by our Leading with Fresh and Accelerating with Digital strategy. Our consistent performance underscores the resiliency and flexibility of our business model, which enables Kroger to thrive in many different operating environments.”

The continued business momentum allowed the company to raise its guidance for fiscal 2023. The company now expects identical sales without fuel to come in between 4.0% and 4.5%. Its adjusted EPS is expected to be $3.95 to $4.05.

KR’s business model has proven resilient in various economic environments and allowed the company to deliver attractive and sustainable returns over time. On September 15, KR’s Board of Directors declared a quarterly dividend of 26 cents per share, payable on December 1.

Also, KR’s current dividend yields 2.2%, while its four-year average yield is 1.96%. The stock’s dividend payout has increased at a 15.3% CAGR over the past three years and 12.9% CAGR over the past five years.

On the other hand, the grocery retailer expanded its services at multiple locations across the United States. On September 16, KR announced the official opening of a new spoke in Birmingham, Alabama. In addition, Kroger delivery became available in Greater Nashville and Chicago Metro Area in August.

Furthermore, on September 8, KR announced a new Smart Way product line. “Smart Way is an exciting, eye-pleasing product line that will be easy for customers to find. By adding a simplified opening price point brand strategy to Our Brands portfolio, we will further cater to every customer, every time,” said Stuart Aitken, Senior Vice President and Chief Merchant and Marketing Officer.

KR’s shares have gained 4.6% year-to-date and 15.7% over the past year to close the last trading session at $47.28.

Here is what could influence KR’s performance in the upcoming months:

Solid Financials

In the fiscal 2022 second quarter ended July 31, 2022, KR’s sales increased 9.3% year-over-year to $34.64 billion. The company’s operating profit amounted to $954 million, up 13.7% year-over-year. Its net earnings before income tax expense grew 58.2% from the prior-year period to $941 million.

Furthermore, adjusted net earnings attributable to KR came in at $661 million, registering an increase of 8.4% year-over-year. Its adjusted EPS rose 12.5% from the year-ago value to $0.90.

Favorable Analyst Estimates

Analysts expect KR’s revenue for the fiscal 2023 third quarter (ending October 2022) to come in at $34.06 billion, indicating an increase of 6.9% from the prior-year period. The consensus EPS estimate for the ongoing quarter is expected to rise 4.3% year-over-year to $0.81.

In addition, KR’s revenue for the fiscal year 2022 (ending January 2023) is expected to rise 7.7% from the previous year to $148.49 billion. Analysts expect the current year’s EPS to grow 10.1% year-over-year to $4.05. Also, the company’s revenue and EPS for the next year are expected to increase 1.9% and 2.4% year-over-year to $151.36 billion and $4.15, respectively.

Discounted Valuation

In terms of forward non-GAAP P/E, KR is currently trading at 11.67x, 38.3% lower than the industry average of 18.90x. The stock’s forward EV/Sales multiple of 0.36 is 79.3% lower than the industry average of 1.73. Likewise, its forward EV/EBITDA ratio of 7.16 compares with an industry average of 11.44.

Furthermore, in terms of forward Price/Sales, KR is currently trading at 0.23x, 80.4% lower than the industry average of 1.16x. The stock’s forward Price/Cash Flow multiple of 5.43 is 59% lower than the 13.25 industry average.

High Profitability

KR’s trailing-12-month ROCE, ROTC, and ROTA of 23.12%, 9.06%, and 5.01% are higher than the industry averages of 12.21%, 6.25%, and 4.77%, respectively. Its trailing-12-month asset turnover ratio of 2.97% is 260.4% higher than the 0.82% industry average. 

Also, the stock’s trailing-12-month cash from operations of $5.49 billion compares to the industry average of $293.00 million.

POWR Ratings Show Promise

KR’s overall A rating equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. KR has a B grade for Quality, in sync with its higher-than-industry profitability metrics. In addition, it has a B grade for Growth, consistent with its solid revenue and earnings growth estimates.

KR is ranked #6 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry.

Beyond what I have stated above, we have also given KR grades for Sentiment, Value, Momentum, and Stability. Get access to all KR ratings here.

Bottom Line

Grocery retailer KR achieved impressive top- and-bottom-line performance in its last quarter and raised full-year 2023 guidance. The company’s resilient and flexible business model enables it to thrive in different operating environments. Also, its capital allocation strategy is to use its free cash flow to invest in the business to drive long-term sustainable growth and deliver attractive shareholder returns.

Given KR’s strong financials, solid growth estimates, lower-than-industry valuation, attractive dividends, and high profitability, we think it could be wise to invest in this stock now.

How Does The Kroger Co. (KR) Stack Up Against its Peers?

KR has an overall POWR Rating of A. One could also check out these other stocks within the Grocery/Big Box Retailers industry with an A (Strong Buy) rating: Albertsons Companies, Inc. (ACI - Get Rating), Ingles Markets Inc. CI A (IMKTA - Get Rating), and Caseys General Stores, Inc. (CASY - Get Rating).

KR shares were trading at $47.30 per share on Monday morning, up $0.02 (+0.04%). Year-to-date, KR has gained 5.97%, versus a -18.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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