Is Kroger (KR) a Buy Amid Mixed Earnings and Valuation Signals?

The grocery retail sector has long been a battleground for margin compression, but Kroger (KR) is defying the odds. Despite a Zacks Rank of #3 and a high PEG ratio, the stock has surged 41.3% over the past year, outperforming both the S&P 500 and its own struggling industry. This raises a critical question: Is Kroger's recent momentum a fleeting rebound, or does it signal a re-rating of a company that's reinventing itself for the digital age?

Contrarian Valuation: A Tale of Two P/E Metrics

Kroger's valuation appears paradoxical. On one hand, its trailing P/E ratio of 19.29 (as of July 18, 2025) sits above its 10-year average of 15.08, suggesting modest overvaluation. On the other, its forward P/E of 13.8—a 14.7% discount to the industry average of 14.99—hints at a compelling opportunity. This divergence reflects divergent timelines: while the market still penalizes Kroger for past struggles with inflation and supply chain costs, analysts are now penciling in stronger earnings growth for 2026.

The PEG ratio of 1.96, though elevated compared to the industry's 1.77, is less concerning when contextualized. Kroger's PEG is inflated by conservative growth estimates (6.49% revenue growth for 2026), not reckless optimism. Yet, with the Zacks Consensus EPS estimate rising 0.37% over the past month and 6.45% annualized growth expected, the company's long-term earnings power may be underestimated.

Earnings Momentum: A Quiet Uptick in Analyst Sentiment

Kroger's EPS revisions tell a nuanced story. While the near-term outlook is mixed—four positive and six negative revisions in the past 30 days for the current quarter—the long-term trend is unmistakably bullish. For 2027, 11 positive revisions in the last seven days alone suggest growing confidence in Kroger's ability to scale its digital initiatives.

The Zacks Retail – Supermarkets industry, ranked #179 out of 250 sectors, is mired in declining earnings estimates (-1.1% since April 2025). Yet Kroger's full-year EPS of $4.76, projected by analysts, outpaces the sector's average. This outperformance is not accidental. The company's investments in automation, AI-driven inventory management, and its partnership with Ocado (a leader in grocery automation) are paying dividends.

Strategic Reinvention: Why the Market May Be Underestimating Kroger

Kroger's transformation is not just about efficiency—it's about redefining the grocery experience. The Boost membership program, now boasting 20 million users, and its Delivery Now service are driving digital sales growth. Meanwhile, the acquisition of Home Chef and expansion of “Our Brands” private-label products are creating higher-margin revenue streams.

These moves are critical in a sector where e-commerce is shifting from a novelty to a necessity. While Walmart (WMT) and Albertsons (ACI) scramble to catch up, Kroger is leveraging its 2,800 U.S. stores as physical anchors for omnichannel logistics. The company's focus on reducing waste via AI-powered inventory management also improves margins—a factor that could become a competitive moat as inflation normalizes.

The Contrarian Case: Buy the Dip or Wait for Clarity?

Kroger's Zacks Rank of #3 is a cautionary flag, but it's not a dismissal. The “Hold” rating reflects the industry's broader struggles rather than Kroger's unique challenges. For contrarian investors, the key is to distinguish between sector-wide headwinds and company-specific momentum.

The forward P/E discount to the industry average suggests the market is still discounting Kroger's transformation. At 13.8, the stock trades at a 14% discount to peers like Albertsons (ACI) and Sprouts (SFM), which have higher P/E ratios despite weaker digital strategies. If Kroger can sustain its 6.49% revenue growth and narrow its PEG ratio to 1.5 (a more attractive level), the stock could see a 25% re-rating.

However, risks remain. The P/E ratio's 28% premium to its 10-year average means any earnings shortfall could trigger a sell-off. Investors must also monitor inflation trends and labor costs, which continue to weigh on the sector.

Final Verdict: A Buy for the Patient Investor

Kroger is not a #1-ranked “Strong Buy,” but its valuation and earnings trajectory make it a compelling case for patient investors. The company's strategic pivot to digital and private-label offerings, combined with a forward P/E that's undervaluing its long-term potential, suggests the market is not fully crediting its reinvention.

For those willing to endure near-term volatility, Kroger represents a rare opportunity in the grocery sector: a company with a clear growth path and a valuation that's still catching up to its fundamentals. The key is to buy with a long-term lens, focusing on the 2027 EPS revisions rather than quarterly noise.