Kroger (KR, Financial) is seeing a 5% uptick today after reporting a solid bottom-line beat for Q2 (Jul), despite nearly flat year-over-year revenue growth. The grocery chain, currently in a legal battle over its proposed $25 billion acquisition of Albertsons (ACI, Financial), delivered several positive trends that indicate improving consumer sentiment as inflation eases.
- KR reported adjusted EPS of $0.93, slightly down from $0.96 last year, and revenues of $33.91 billion, a 0.2% year-over-year increase. Identical sales without fuel rose by 1.2% in Q2, up from 0.5% in Q1 (Apr).
- Management noted that moderating inflation should boost customer sentiment. Q2 CPI reports showed minimal increases in food-at-home prices, with a 0.0% rise in August, suggesting a positive start to Q3 (Oct).
- Despite stable food-at-home prices, inflation-related challenges persist. Budget-conscious households are still limiting spending, and other segments are reducing basket sizes and focusing on essentials.
- This value-seeking behavior is driving more traffic to competitors like Walmart (WMT, Financial) and Costco (COST, Financial). COST's August comp data showed mid-single-digit gains in food and sundries and high-single-digit growth in fresh food. Walmart reported increased grocery sales, indicating its ability to help customers stretch their dollars.
- KR is still attracting households, thanks to its private label brands that differentiate it from other grocers and boost margins. FIFO gross margins expanded by 42 bps year-over-year in Q2. KR raised the low end of its FY25 (Jan) comp guidance to 0.75-1.75% from 0.25-1.75% and reiterated its FY25 adjusted EPS forecast of $4.30-4.50.
- Regarding the pending merger with ACI, closing arguments are expected soon. KR remains committed to finalizing the merger.
KR's improved Q2 performance highlights its strong position in the grocery industry, maintaining competitive pricing and offerings against larger rivals. As the FTC's preliminary injunction hearing nears its conclusion, clarity on the ACI merger could sustain KR's upward momentum. However, dynamic shopper trends keep short-term concerns high, potentially leading to increased quarterly volatility.
