Albertsons Merger And Our Brands Expansion Will Fuel Earnings Growth

Key Takeaways

• Kroger's digital sales and e-commerce investments, along with the pending Albertsons merger, are set to boost growth and profitability.
  
• Enhancements in private label offerings and precision marketing efforts aim to boost sales and improve margins significantly.
  
• Revenue may decline due to divestitures, high competition, and inflation, while digital growth and supply chain issues further challenge profitability and market share.

Catalysts

Operates as a food and drug retailer in the United States.

• Kroger's investments in digital sales and e-commerce, such as their customer fulfillment centers and Boost membership model, are expected to drive future growth. Increased e-commerce penetration can lead to higher revenues and enhance customer loyalty.
  
• The pending merger with Albertsons is positioned as a future growth catalyst due to the complementary strengths of both companies, potentially resulting in increased market share and improved financial synergies, which could positively impact Kroger's earnings and profitability.
  
• Enhancements in the Our Brands portfolio and manufacturing capabilities are designed to meet specific customer needs and offer better value, aiming to increase sales. This can support higher net margins due to the higher profitability of private label products compared to national brands.
  
• Advancements in the application of data and technology, like RFID in bakery items, are expected to improve inventory management and freshness, likely leading to increased sales and reduced shrinkage, boosting overall gross margins.
  
• Sustained growth in alternative profit businesses, particularly through Kroger Precision Marketing, contributes to profitability beyond traditional grocery revenues, indicating potential uplift in Kroger's operating margins.

Kroger Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kroger's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 2.2% in 3 years time.
• Analysts expect earnings to reach $3.4 billion (and earnings per share of $4.83) by about December 2027, up from $2.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2027 earnings, down from 16.0x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.72%, as per the Simply Wall St company report.

Kroger Future Earnings Per Share Growth

Risks

• The sale of Kroger Specialty Pharmacy, which was a low-margin business, will reduce total company sales going forward by approximately $3 billion annually. This poses a risk to overall revenue.
  
• Budget-conscious households remain under pressure due to multiyear inflation and higher interest rates, impacting spending habits. This could limit revenue growth.
  
• Digital growth is important but has not yet achieved profitability comparable to in-store shopping, potentially affecting operating margins.
  
• Competition from restaurants and other grocery channels remains high, risking loss of market share and impacting revenue from mainstream and premium customers.
  
• Boar's Head recalls and similar supply chain issues could have a continued negative impact on sales and customer loyalty, affecting revenue streams.

Valuation

• The analysts have a consensus price target of $63.14 for Kroger based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $73.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $155.2 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $60.73, the analyst's price target of $63.14 is 3.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.