The consumer staples sector comprises companies that enjoy steady demand for their products regardless of business cycles. Despite increased fears of an economic slowdown, investors consider this sector safe since consumers cannot cut back on necessities even in a recession.
Within this resilient sector, Kroger Co. (KR) could be one of the best investment options now, given its fundamental strength and growth prospects. KR operates combination food and drug stores, multi-department stores, marketplace stores, and price-impact warehouses. It runs over 2,726 supermarkets under various banner names in 35 states and the District of Columbia.
On October 14, KR and Albertsons Companies (ACI) announced that they have entered into a definitive agreement under which the companies will merge, aiming to expand the customer reach and improve proximity to deliver fresh and affordable food to approximately 85 million households with a premier omnichannel experience.
According to the merger agreement, KR would acquire outstanding shares of ACI common and preferred stock for an estimated total consideration of $34.10 per share, implying a total enterprise value of nearly $24.60 billion.
“As a combined entity, we will be better positioned to advance Kroger's successful go-to-market strategy by providing an incredible seamless shopping experience, expanding Our Brands portfolio, and delivering personalized value and savings. We believe this transaction will lead to faster and more profitable growth and generate greater returns for our shareholders,” said Rodney McMullen, Kroger Chairman, and CEO.
KR delivered solid second-quarter results propelled by its “Leading with Fresh and Accelerating with Digital” strategy. The company’s consistent performance underscores its business model's resilience and flexibility, enabling it to thrive in different operating environments.
The retailer continues to generate strong free cash flow (FCF) and remains committed to investing in its business to drive long-term sustainable net earnings growth, maintaining its current investment-grade debt and enhancing shareholder value through share repurchases and dividends.
On September 15, KR’s Board of Directors declared a quarterly dividend of 26 cents per share, payable on December 1. The company’s quarterly dividend has grown at a 14% CAGR since it was reinstated in 2006. It pays a $1.04 dividend annually, yielding 2.2% at the current share price. Its 4-year average dividend yield is 1.97%.
KR has gained 6.7% over the past month and 16.9% over the past year to close the last trading session at $47.29.
Here is what could influence KR’s performance in the upcoming months:
Robust Financials
KR’s sales increased 9.3% year-over-year to $34.64 billion in the fiscal 2023 second quarter ended August 13, 2022. Its operating profit increased 13.7% year-over-year to $954 million. The company’s adjusted EBITDA grew 10.9% from the year-ago value to $7.63 billion, while its adjusted EPS improved 12.5% year-over-year to $0.90.
Improved Guidance
“Our second quarter results prove that Kroger has the right go-to-market strategy. Our consistent execution of this strategy is building momentum in our business which, combined with sustained food-at-home trends, gives us the confidence to raise our full-year guidance,” commented CFO Gary Millerchip.
The company now expects identical sales without fuel to be in the range of 4.0% to 4.5% and adjusted net earnings per share in the range of $3.95 to $4.05. Its operating profit is expected to be in the range of $4.60 to $4.70 billion, while its free cash flow is expected to be in the range of $2.30 to $2.50 billion.
Favorable Analyst Estimates
Analysts expect KR’s revenue for the fiscal 2023 third quarter (ended October 2022) to come in at $34 billion, indicating an increase of 6.7% year-over-year. The consensus EPS estimate of $2.35 for the to-be-reported quarter indicates a 3.1% year-over-year increase. The company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
In addition, the consensus revenue and EPS estimate of $148.32 billion and $4.08 for the current fiscal year (ending January 2023) represents a 7.6% and 10.9% year-over-year increase, respectively.
High Profitability
KR’s trailing-12-month ROCE, ROTC, and ROTA of 25.55%, 9.06%, and 5.01% compare to the industry averages of 6.21%, 4.63%, and 3.21%, respectively. Likewise, the stock’s trailing-12-month asset turnover ratio of 2.97% is 265.6% higher than the industry average of 0.81%.
Discounted Valuation
In terms of its forward non-GAAP P/E, KR is trading at 11.58x, 38% lower than the industry average of 18.69x. The stock’s forward EV/Sales multiple of 0.36 is 79.5% lower than the industry average of 1.73. Moreover, its forward EV/EBITDA of 7.10x is 40.5% higher than the industry average of 11.94x.
Also, in terms of forward Prices/Sales, the stock is currently trading at 0.23x, 81.5% lower than the industry average of 1.23x. Its forward Price/Cash Flow multiple of 5.43x is 60.8% lower than the industry average of 13.87.
POWR Ratings Show Promise
KR has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. KR has a B grade for Value, in sync with its lower-than-industry valuation metrics. Also, it has a B grade for Growth, consistent with solid revenue and earnings growth estimates.
In addition, the stock has a B grade for Quality, in sync with its higher-than-industry profitability metrics.
KR is ranked #8 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry.
Click here to access KR’s Sentiment, Stability, and Momentum ratings.
Bottom Line
KR’s revenue and net income have increased at CAGRs of 5.9% and 14.1% over the past three years, respectively. Moreover, given the company’s defensive and non-cyclical nature, it is well-positioned to maintain its performance amid the expected economic slowdown.
Given its robust financials, solid growth prospects, high profitability, attractive dividends, and low valuation, we think it could be wise to buy this stock now.
How Does Kroger Co. (KR) Stack Up Against its Peers?
KR has an overall POWR Rating of A, equating to a Strong Buy. Check out these other stocks within the Grocery/Big Box Retailers industry with an A (Strong Buy) rating: Walmart Inc. (WMT), Caseys General Stores, Inc. (CASY), and Ingles Markets Inc. CI A (IMKTA).
KR shares rose $0.50 (+1.06%) in premarket trading Tuesday. Year-to-date, KR has gained 5.95%, versus a -17.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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