Kroger Stock is a Win-Win for Buy-and-Hold Investors

Key Points

• Kroger still faces hurdles but is on track for accelerated growth, capital returns, or both.
• The merger with Albertsons Companies is still in play, but it will not be a deal breaker for investors if it is blocked.
• Analysts provide a tailwind for price action that will drive it to new highs by early 2025, if not sooner. 

Kroger's NYSE: KR stock price has struggled since early 2022 when the pandemic-driven bubble burst. There are still hurdles, including the stalled merger with Albertsons Companies NYSE: ACI, but they are diminishing, and investors are faced with a win-win situation regardless of them. The company has been building capital and improving its balance sheet for nearly two years, setting it up for a smooth closing and accelerated growth when the Albertsons deal is closed or accelerating capital returns if blocked. 

Kroger’s financial health is evident throughout its balance sheet statement. At the end of FQ2, the balance sheet highlights include a 15% increase in cash and equivalents, a 10% increase in current assets, a 2.5% gain in total assets, and reduced debt and liability. The net result is an 18% increase in equity and improving book value that is not expected to end. The company’s growth strategy is working, with or without the ACI merger. 

The takeaway for investors is that Kroger is looking ahead to accelerating growth with the merger and accelerating growth and capital returns without. Either will drive value for shareholders over time. If the deal is approved, investors can expect capital returns to continue, including the resumption of share repurchases, which have been halted to preserve capital. Until then, the dividend is worth about 2.5% and comes with an expectation for distribution growth.

Kroger has a Mixed Quarter, Widens Margin; Shares Move Higher

Kroger had a mixed quarter relative to the analysts' consensus estimates reported by Marketbea. However, it was a strong quarter in light of the store divestitures made to appease regulators and smooth the path to closing the ACI merger. The company reported $33.91 billion in net revenue, essentially flat compared to the last year, as improving comps offset the decline in gasoline prices.  Sales ex-fuel rose by 1.3% across the network, with comps up 1.2% and margins strong. The strength is driven by traffic, digital sales, and loyalty membership at record levels. Regarding the expectations, the small sixty basis point miss is negligible in light of margin, earnings and cash flow.

The margin news is strong. The company widened its gross margin, offset by an expected increase in SG&A attributed to staffing and benefits, leaving the margin relatively flat compared to last year. The adjusted FIFO earnings of $0.93 are down $0.03 compared to the previous year, but $0.02 or roughly 250 basis points better than expected, with the strength expected to continue. 

Guidance is good and should help support the stock until the subsequent release. The company increased its forecast for comp sales to the high-end range while reaffirming the robust outlook for earnings and cash flow. The adjusted free cash flow is forecast to range around $2.6 billion, or about 55% of operating profit, giving a dividend-to-FCF payout ratio of 65%. This sustainable figure leaves room for distribution increases, given the outlook for earnings growth, which is expected to resume next year. 

Analysts Provide A Tailwind for Kroger Stock

The analyst price target revisions in 2024 are providing a tailwind for Kroger stock, with the sentiment rating up to Moderate Buy from Hold and the consensus target rising. The consensus target implies a 5% upside from the $55 level, a move to $59 and a new multi-year high when reached. A move to $59 is also significant because it would be the highest price action since the ACI merger was released and sets the market up to hit a new all-time high. 

The price action in KR stock surged more than 5% following its Q2 release, showing significant support at a higher level than earlier in the year. The move also shows price support at a pair of rising moving averages, which may drive the action even higher. The critical resistance point is near $55.60 and may be broken soon. A break of resistance at this level would align the retail stock with the long-term up trend and set it up to retest the all-time highs or move even higher.