Kroger's posts mixed results under heavy geopolitical scrutiny; Provides update on Albertson's merger

Kroger (KR) reported Q2 results with adjusted EPS of $0.93, exceeding the consensus estimate of $0.91. However, revenue came in slightly below expectations at $33.91 billion, versus the forecasted $34.05 billion. Identical-store sales, excluding fuel, rose by 1.2%, also surpassing the consensus estimate of 0.99%. Despite a modest miss on revenue, the company demonstrated resilience in a competitive grocery landscape, with improved identical sales reflecting its ability to attract value-seeking customers through promotions and competitive pricing.

In terms of guidance, Kroger raised the lower end of its full-year forecast for identical sales growth, now expecting a range of 0.75% to 1.75%, up from the previous floor of 0.25%. The company reaffirmed its adjusted EPS outlook for fiscal 2024, projecting between $4.30 and $4.50, and maintained its forecast for adjusted FIFO operating profit at $4.6 billion to $4.8 billion. Additionally, Kroger updated its capital expenditure guidance to $3.6 billion to $3.8 billion, slightly above the previous range of $3.4 billion to $3.6 billion. This upward revision reflects the company’s commitment to investing in its infrastructure while maintaining financial flexibility.

One of the key drivers for Kroger’s performance was its digital sales, which grew by 11% year-over-year, and a 17% increase in delivery sales, boosted by Customer Fulfillment Centers. Kroger also added more households and saw an increase in customer visits, thanks to its seamless shopping experience and personalized promotions. This helped Kroger maintain a strong customer base despite competitive pressures, particularly from Walmart, which continues to dominate the low-cost grocery space.

Kroger's gross margin came in at 22.6%, slightly above the expected 22%. This improvement was driven by a favorable product mix, including its private label "Our Brands" offerings, lower shrink, and sourcing benefits. These gains were offset somewhat by lower pharmacy margins. The company’s strategy of investing in pricing and promotions helped it stay competitive while managing its cost structure efficiently, as evidenced by the 42-basis-point increase in the FIFO gross margin rate, excluding fuel, compared to last year.

In terms of operating performance, Kroger reported an adjusted FIFO operating profit of $984 million, surpassing analyst expectations of $976.8 million. Despite a LIFO charge of $21 million, up from $4 million in the previous year, the company was able to deliver strong adjusted free cash flow. This financial strength will be critical as Kroger navigates its pending merger with Albertsons, a key strategic initiative aimed at expanding its market presence and driving long-term growth.

On the Albertsons merger front, Kroger’s CEO, Rodney McMullen, reaffirmed the company’s commitment to closing the deal, expressing confidence in the facts presented during the FTC’s preliminary injunction hearing. McMullen emphasized that the merger would benefit customers by lowering prices and expanding access to fresh food, while also protecting jobs. The deal, valued at $25 billion, remains under regulatory scrutiny, with some concerns about potential price increases and reduced bargaining power for unionized grocery workers.

In summary, Kroger’s Q2 performance demonstrates its ability to navigate a challenging retail environment by focusing on affordability, customer engagement, and digital growth. While revenue slightly missed expectations, the company’s strong EPS performance, improved margins, and raised guidance provide a positive outlook for the remainder of fiscal 2024. With the Albertsons merger on the horizon, Kroger is positioning itself for long-term success, leveraging its scale and operational efficiencies to stay competitive in the evolving grocery industry.