On Thursday, Evercore ISI maintained its Outperform rating on shares of Kroger Co . (NYSE:KR) with a steady price target of $62.00. The firm's positive outlook is based on Kroger's second-quarter performance, which showed an increase in identical store sales (ID sales) of 1.2% and a growth in customer traffic and households.
The report highlighted a notable improvement in FIFO gross margin, which expanded by 42 basis points year-over-year, contributing to an earnings per share (EPS) that slightly surpassed expectations at $0.93, compared to the predicted $0.91.
Kroger's quarterly results outperformed amid concerns regarding a decelerating core consumer and heightened competition. The company reiterated its full-year earnings guidance of $4.30 to $4.50 per share, aligning with the previous consensus estimate of $4.44. The grocery chain's adjusted EPS of $0.93 for the quarter marked a 3% decline from the previous year but still exceeded both Evercore's and the Street's estimates of $0.90 and $0.91, respectively.
The retailer also reported an uptick in ID sales from the first quarter's 0.5% to 1.2% in the second quarter, surpassing the Street's forecast of 1.1%. This increase in ID sales, along with the expansion of FIFO gross margin, represents a positive shift from the 7 basis point decline in the previous quarter.
Kroger has updated its ID sales forecast for the year, raising it from the range of 0.25% to 1.75% to a new range of 0.75% to 1.75%, with a midpoint of 1.3% against the prior Street outlook of 1.2%.
Looking ahead, Kroger's midpoint guidance for the calendar year 2024 EPS is $4.40, which is slightly below the Street's previous expectation of $4.44. The company's FIFO operating profit guidance for the year stands at a midpoint of $4.7 billion, which is 2% higher than the Street's former projection. The full-year guide suggests an adjusted FIFO operating profit rate of approximately 3.0% to 3.2%, which is consistent with, or slightly higher than, the previous year's margin rate.
Kroger remains a top choice for value investors, previously trading at approximately 11.5 times the calendar year 2025 EPS. The potential Kroger-Albertsons Companies Inc. (ACI) merger is anticipated to provide a significant multi-year synergy if it closes later this year or early next year. Evercore ISI's $62 price target reflects confidence in Kroger's earnings improvement, driven by solid ID sales trends and the potential for a recovery in stock valuation.
In other recent news, Kroger Co. is facing potential regulatory hurdles regarding its proposed merger with Albertsons (NYSE:ACI) Companies Inc. BMO Capital maintains an Outperform rating for Kroger, despite the ongoing Federal Trade Commission (FTC) antitrust trial. The trial's outcome could significantly impact Kroger's financial future. BMO Capital's assessment reflects a cautious but optimistic outlook on the company's stock performance.
The FTC's scrutiny of the Kroger-Albertsons deal underscores the challenges companies can face when pursuing large-scale mergers. Kroger CEO Rodney McMullen defended the merger, attributing rising grocery prices to higher supplier costs, fuel prices, and credit card swipe fees. He denied the possibility of Kroger raising its prices post-merger.
Concurrently, Kroger issued $10 billion in senior notes across seven tranches, a strategic financial move amidst the competitive retail grocery market. This development comes as the FTC challenges the merger, citing concerns over potential negative impacts on consumers and workers. The trial is a part of a broader initiative to use antitrust law to potentially improve wages and mobility for workers, and address rising costs for consumers.
InvestingPro Insights
As Kroger Co. (NYSE:KR) continues to navigate through a competitive retail landscape, InvestingPro data highlights key financial metrics that investors may find valuable. With a market capitalization of $38.57 billion, Kroger stands as a significant player in the Consumer Staples Distribution & Retail industry.
The company's Price/Earnings (P/E) ratio, as of the last twelve months leading up to Q1 2025, is attractively valued at 11.21, suggesting that the stock may be undervalued compared to historical averages. Moreover, the company has demonstrated consistent profitability with a Gross Profit Margin of 22.99% for the same period, reinforcing its operational efficiency.
InvestingPro Tips also reveal that Kroger has a commendable track record of returning value to shareholders. The company has raised its dividend for 18 consecutive years and has maintained dividend payments for 19 consecutive years, indicating a strong commitment to consistent shareholder payouts. This is particularly noteworthy for income-focused investors.
Furthermore, analysts are optimistic about Kroger's prospects, predicting profitability for the current year. As of now, there are over 6 additional InvestingPro Tips available for Kroger, offering deeper insights for those considering an investment in the company.
For those interested in exploring these metrics further, additional InvestingPro Tips can be found at https://www.investing.com/pro/KR, providing a comprehensive analysis that could aid in making informed investment decisions.
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