Kroger Earnings Preview- Watching grocery store margins
2min read Kroger (KR) is set to report its Q2 earnings tomorrow before the market opens, with analysts expecting EPS of $0.91 and revenue of $34.09 billion, according to FactSet. This earnings report will be closely watched, not only for insights into the company’s performance but also for indications on grocery store margins, a topic that has gained attention in the lead-up to the upcoming presidential debate. Additionally, Kroger’s ongoing attempt to acquire Albertsons (ACI) will be a key point of discussion, especially given the scrutiny from the Federal Trade Commission (FTC) under Lina Khan, making this report critical for both investors and regulators.
Q1 Recap and Outlook
Kroger's Q1 earnings report reflected a solid start to FY24, with earnings per share (EPS) of $1.43, beating the consensus estimate of $1.35. Revenues grew slightly by 0.2% year-over-year to $45.27 billion, slightly ahead of expectations. Identical sales, excluding fuel, increased by 0.5%, showing some resilience in a competitive environment. However, despite an initial 2% rise in the stock price after the earnings release, shares quickly fell as management's cautious comments during the conference call intensified selling pressure.
Management acknowledged continuous improvements in customer sentiment but warned of ongoing economic uncertainty affecting its client base. Shoppers have continued to seek value, leading to shifts in shopping behavior. Kroger noted that it has improved its share of wallet with premium customers, though details on its approach to budget-conscious households were sparse. The company faces stiff competition from retailers like Walmart and Costco, which have aggressively cut prices to gain market share. This competitive pressure could make it difficult for Kroger to maintain stable margins while holding onto customer traffic.
Looking ahead, Kroger reaffirmed its guidance for FY25, expecting EPS of $4.30-$4.50, slightly in line with the $4.44 FactSet consensus. The company also reaffirmed its identical sales growth guidance of +0.25% to 1.75%, excluding fuel. While management expressed optimism about achieving flat year-over-year gross margin growth by FY25, investor skepticism was evident in the stock's reaction. Kroger remains committed to paying its quarterly dividend and expects it to increase over time, though share repurchases have been paused to prioritize de-leveraging ahead of its proposed merger with Albertsons.
Kroger's bid for Albertson
Kroger’s $25 billion bid to acquire Albertsons is about more than just expanding its store count; it's also aimed at gaining deeper insights into millions of additional customers through loyalty programs and online sales data. This would allow Kroger to better target advertising and enhance sales efforts. The proposed acquisition, announced in October 2022, would bring Kroger’s total store count to over 4,400, up from 2,700, and boost annual sales to $208 billion. Kroger would also become one of the largest private employers, with about 640,000 workers. To alleviate antitrust concerns, Kroger has agreed to sell off 579 stores to C&S Wholesale Grocers.
A critical hearing over the merger is concluding in federal court, where Kroger is facing opposition from the Federal Trade Commission, which is seeking to block the deal on antitrust grounds. Closing arguments are expected soon, after which U.S. District Court Judge Adrienne Nelson will decide whether to grant an injunction that could halt the merger. Kroger has stated that if the ruling goes against them, the merger may not happen, as further legal battles could be lengthy and costly. If approved, Kroger promises to cut grocery prices by $1 billion and maintain jobs and stores as part of its plan to compete more effectively with larger rivals like Walmart and Amazon.