The Kroger Co. (KR, Financial) recently held its second-quarter 2023 earnings conference call, where the company's senior leadership discussed its financial performance, the consumer environment, and its future plans. The company's chairman and CEO, Rodney McMullen, and CFO, Gary Millerchip, highlighted the strength of Kroger's value creation model in supporting earnings growth and generating strong free cash flow amidst a challenging economic environment.
Consumer Environment and Business Performance
Kroger continues to navigate a challenging environment, delivering consistent results despite economic uncertainties. The company's robust business model has enabled it to provide value to its customers, invest in its associates, and deliver consistent shareholder returns. The company has seen different impacts on customer segments, with higher-income households engaging more deeply and budget-conscious households facing external spending pressures. Despite these challenges, Kroger is focused on driving more units in the second half of the year and improving its price position relative to key competitors.
Financial Results and Highlights
Kroger's second-quarter results demonstrate the resilience of its value creation model. The company's investments over recent years have enabled it to deliver consistent results despite a difficult environment. Key highlights for the quarter include EPS growth despite a significant year-over-year headwind from fuel profitability and underlying operating results excluding fuel improved versus the prior year due to strong gross margin management, tight cost controls, and continued growth in alternative profit businesses.
Nationwide Opioid Settlement Framework
Kroger announced a nationwide opioid settlement framework to settle substantially all opioid lawsuits and claims against the company. As a result, the company recorded a $1.4 billion charge related to the settlement, resulting in a loss per share of $1.54 this quarter. The settlement will not affect Kroger's ability to complete its proposed merger with Albertsons, and the company remains on track to achieve a net total debt to adjusted EBITDA ratio of 2.5 within 18 to 24 months post-close.
Divestiture Plan and Merger with Albertsons
Kroger and Albertson Companies announced that they've entered into a definitive agreement with C&S Wholesale Grocers for the sale of 413 stores in connection with their proposed merger. The divestiture plan ensures no stores will close as a result of the merger and that all frontline associates will remain employed. The financial terms of this divestiture plan are in line with what was expected and allow the company to reaffirm the compelling shareholder value creation opportunity this transaction creates. The proposed merger with Albertsons is expected to close in early 2024.
In conclusion, despite the challenging environment, Kroger remains confident in the strength and resilience of its value creation model, which will allow it to continue to deliver attractive and sustainable total shareholder returns.
