The Kroger Co. (KR), one of the largest grocery retailers in the U.S., is currently facing legal challenges as it moves forward with its $25 billion merger with Albertsons Companies, Inc. (ACI). This high-profile merger, announced in October 2022, is now under scrutiny in a federal hearing in Portland, Oregon, as the Federal Trade Commission (FTC) and several states push back with an antitrust lawsuit.

The FTC argues that the merger could stifle competition, potentially leading to higher prices for everyday essentials like groceries, along with reduced product quality and fewer options for consumers. Further, FTC’s Bureau of Competition Director Henry Liu added, “Essential grocery store workers would also suffer under this deal, facing the threat of their wages dwindling, benefits diminishing, and their working conditions deteriorating.”

This sentiment is echoed by many critics, including union supporters, who recently rallied against the merger in Denver. Grocery workers and farmers expressed concerns that the deal would only benefit corporations, leaving workers and the supply chain at risk. Some worry that a merger of this scale could result in devastating consequences for employees, farmers, and consumers, who might face higher costs at the checkout line.

On the other hand, KR and ACI maintain that the merger will help them better compete with retail giants like Walmart Inc. (WMT), Costco Wholesale Corporation (COST), and Amazon.com, Inc. (AMZN), ultimately benefiting consumers through lower prices.

While the courtroom drama continues, some industry analysts raise another critical point. They argue that the time KR has spent pursuing this merger could have been better spent improving its competitiveness in other ways. According to Halliday, if the merger is blocked, the company might face a strategic dilemma, as it has relied heavily on acquisitions to fuel its growth.

Despite the challenges, shares of KR have gained 10.1% over the past month and 24.4% over the past year, closing the last trading session at $55.89. So, as the merger battle continues to unfold, investors must weigh the potential long-term growth opportunities against the immediate legal and operational risks Kroger faces.

Here are the financial aspects of KR that could influence its price performance in the near term:

Strong Financials

KR’s sales for the fiscal second quarter (ended August 17, 2024) remained nearly flat year-over-year at $33.91 billion, while its identical sales without fuel increased 1.2% year-over-year. Its operating profit amounted to $815 million compared to a year-ago loss of $479 million.

Similarly, the company’s net earnings attributable to KR amounted to $466 million or $0.64 per common share versus a net loss of $180 million or $0.25 per share, respectively, in the same period last year. On an adjusted basis, Kroger’s performance was even stronger. The adjusted FIFO operating profit amounted to $984 million, and adjusted EPS stood at $0.93.

Looking ahead to 2024, Kroger remains cautiously optimistic, with identical sales without fuel anticipated to grow between 0.75% and 1.75%. Adjusted FIFO operating profit is projected to be between $4.6 billion and $4.8 billion, while adjusted net earnings per diluted share are expected to range from $4.30 to $4.50.

These projections underscore the company’s confidence in its strategic direction and operational efficiency, emphasizing its focus on sustainable growth and operational excellence.

Mixed Analyst Estimates

Analysts expect KR’s EPS to increase 2.9% year-over-year to $0.98 for the third quarter ending October 2024. Also, its revenue for the current quarter is expected to grow marginally from the prior year’s value to $34.22 billion.

However, KR’s revenue and EPS for the current year (ending January 2025) are expected to decline 0.6% and 6.7% year-over-year to $149.16 billion and $4.44, respectively.

Nonetheless, for the fiscal year ending January 2026, KR’s revenue is expected to increase 1.9% year-over-year to $152.02 billion. The company is estimated to post an earnings per share of $4.56 next year, indicating a 2.7% improvement from the prior year.

Discounted Valuation

In terms of forward non-GAAP P/E, KR is trading at 12.59x, 28.5% lower than the industry average of 17.61x. Likewise, its forward EV/Sales multiple of 0.38 is 78% lower than the industry average of 1.74x. In addition, the stock’s forward EV/EBITDA of 7.28x is 33.2% lower than the 10.90x industry average. Also, its forward Price/Sales multiple of 0.27 compares to the industry average of 1.37.

High Profitability

KR’s trailing-12-month ROCE of 23.97% is 129.1% higher than the 10.46% industry average. The stock’s 9.71% trailing-12-month ROTC is 41.5% above the 6.86% industry average. Further, its trailing-12-month asset turnover ratio of 2.96x compares to the industry average of 0.84x.

POWR Ratings Exhibit Solid Prospects

KR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Strong Buy in our proprietary rating 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 boasts a B grade for Value, mirroring its discounted valuation. It also earns a B for Quality, reflecting its higher profitability metrics compared to industry standards.

Within the A-rated Grocery/Big Box Retailers industry, KR is ranked #26 out of the 37 stocks.

Beyond what we’ve stated above, we have also rated the stock for Growth, Momentum, Stability, and Sentiment. Get all KR ratings here.

Bottom Line

Despite the legal challenges of its proposed merger, KR’s financials remain robust. The company continues to demonstrate strong profitability, backed by steady operational growth and healthy margins. Moreover, its resilient business model has consistently delivered sustainable returns, even in challenging economic conditions.

On September 19, the company declared a quarterly dividend of 32 cents per share, continuing its 16-year streak of dividend growth. The current dividend of $1.28 per share yields 2.29%, above its four-year average of 2.01%. Also, its payouts have grown at impressive CAGRs of 16.6% and 15.5% over the past three and five years, respectively.

Further, the stock is currently trading at a discounted valuation, which makes it an attractive option for investors seeking value in the grocery retail sector. While the merger’s outcome remains uncertain, KR’s long-term growth potential and ability to compete with industry giants make it a strong buy for investors seeking upside amid uncertainty.

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

While KR has an overall grade of B, equating to a Buy rating, you may also check out these other stocks within the Grocery/Big Box Retailers industry: Ryohin Keikaku Co., Ltd. (RYKKY), DFI Retail Group Holdings Limited (DFIHY), and Marks and Spencer Group plc (MAKSY), all of which carry A (Strong Buy) ratings. To explore more Grocery/Big Box Retailers stocks, click here. 

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KR shares were trading at $55.78 per share on Monday afternoon, down $0.11 (-0.20%). Year-to-date, KR has gained 24.21%, versus a 21.15% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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