Boosting Retail Innovation With Personalization And Digital Growth Spurs Market Leadership

Key Takeaways

• Kroger aims to bolster customer loyalty and wallet share through affordable pricing and personalized promotions, enhancing revenue growth.
  
• Expansion of in-house brands and investments in a seamless shopping experience aim to improve profitability and elevate e-commerce engagement.
  
• Pending merger with Albertsons and increased operating expenses from investments in wages and price cuts might pressurize margins and profitability.

Catalysts

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

• Kroger is focusing on driving positive customer activity through affordable prices and personalized promotions, aiming to increase customer loyalty and grow share of wallet, which is expected to enhance revenue growth.
  
• The expansion of the multi-tiered portfolio of Our Brands products at lower price points than national brands provides exceptional alternatives expected to improve mix and drive better profitability through higher-margin sales.
  
• Investments in Kroger's seamless shopping experience and digital sales growth, including the Boost membership program offering savings and free delivery, are anticipated to elevate e-commerce households. This could lead to increased loyalty and higher spending per customer, potentially boosting revenue and margins.
  
• Leveraging data and insights for personalized promotions is generating greater unit lift on promotions compared to the industry, aiming to increase sales and improve promotional effectiveness, which may enhance revenue and profitability.
  
• Alternative profit streams, such as Kroger Precision Marketing, are contributing to strong performance in segments outside of traditional grocery sales, expected to deliver more than 20% media growth. This diversification of revenue sources can provide additional growth avenues and support overall earnings growth.

Assumptions

• Analysts are assuming Kroger's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 2.1% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $4.61) by about October 2027, up from $2.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2027 earnings, up from 14.6x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 22.2x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Risks

• Increasing inflation and interest rates are straining customers' spending capabilities, potentially reducing discretionary spending and impacting revenue growth.
  
• The aggressive focus on cutting prices to maintain customer loyalty and market share might compress margins if not offset by operational efficiencies or higher-margin product sales.
  
• The ongoing transformation and disruption within the pharmacy industry pose risks to profitability in the health and wellness segment, potentially affecting overall net margins.
  
• Investments in associate wages and efforts to be an employer of choice could increase operating expenses, potentially impacting net income if cost savings measures do not fully offset these investments.
  
• The pending merger with Albertsons, while potentially beneficial in the long term, introduces near-term uncertainties and execution risks that could affect financial performance and distract from day-to-day operations.

Valuation

• The analysts have a consensus price target of $59.04 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 $70.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $157.1 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of $56.14, the analyst's price target of $59.04 is 4.9% 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.