Focusing On 'Our Brands' And Digital Sales Will Drive Future Success

Key Takeaways

• Focus on fresh, affordable food and own brands drives traffic, customer loyalty, and improved sales volume and margins.
  
• Digital sales growth and expansion into high-margin businesses like Media and wellness are key revenue and profit drivers.
  
• Inflation, higher interest rates, and increased operational costs including labor and commodity tariffs threaten Kroger's revenue growth and net margins.

Catalysts

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

• Kroger is enhancing their go-to-market strategy by focusing on fresh and affordable food with operational excellence, which may drive traffic, increase revenues, and improve sales volume over time.
  
• Kroger's digital sales channel is a growth driver with more than $13 billion in sales in 2024. With improved digital profitability through automation, technology, and volume improvements, it can continue to contribute meaningfully to revenue and potentially improve gross margins.
  
• The growth of Kroger’s own brands (Our Brands) is a key differentiator, offering high-quality products at a value, which can increase customer loyalty and contribute to revenue growth as well as improve net margins due to higher profitability compared to national brands.
  
• Expansion in alternative profit businesses, such as Media and health and wellness, provides high-margin growth opportunities. Successful results in these areas can lead to incremental operating profit, significantly impacting net earnings in 2025 and beyond.
  
• Kroger's commitment to shareholder returns through an aggressive share repurchase program and store expansions in high-growth areas may enhance earnings per share and market share over the long term, therefore potentially positively impacting stock valuation.

Kroger Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kroger's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 2.0% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $5.08) by about April 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 24.9x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Kroger Future Earnings Per Share Growth

Risks

• The impact of multiyear inflation and higher interest rates has pressured spending from budget-conscious households, potentially affecting future revenue growth and earnings.
  
• The increase in incentive plan costs and investment in associate wages may pressure net margins, especially since these costs were only partially offset by cost-saving initiatives.
  
• Slower growth in advertiser spend has led to alternative profit businesses falling short of initial expectations, which could impact net margins if this trend continues.
  
• The impact of tariffs on certain fresh commodities like produce may increase operational costs, which might pressure gross margins and affect overall profitability.
  
• Disruption from labor agreements and potential union pension cost increases could lead to higher operational expenses, affecting both net margins and earnings.

Valuation

• The analysts have a consensus price target of $67.232 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 $76.0, and the most bearish reporting a price target of just $57.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $157.0 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of $68.14, the analyst price target of $67.23 is 1.4% lower. 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.