Kroger (KR) Sees Quick Profit-Taking Activity Despite Decent Q3 Report; ACI Regulatory Hurdles Loom
1:56 pm Tuesday, November 29th, 2022
Kroger (KR -1%) quickly returned its gains today despite the grocery retailer’s decent earnings beat in Q3 (Oct). Same-store sales growth, excluding fuel of +6.9%, also topped estimates, underpinning sustained eat-at-home trends even as dining out continues to rebound. KR also hiked its FY23 forecasts.
So why did shares quickly sell-off? Perhaps investors were hoping for more information on KR’s massive $24.6 bln merger with Albertsons (ACI). CEO William McMullen only briefly touched on the acquisition, noting that talks with regulators are ongoing, and he feels confident in the previously mentioned early 2024 close. The deal is expected to face tall regualtory hurdles, which could prove a distraction, allowing competitors to pounce on KR’s market share. Profit-taking could also be in the cards as shares of KR have soared since enduring a sell-the-news reaction to its merger with ACI in mid-October, climbing around 17%.
Part KR’s success can be attributed to its private labels, or “Our Brands,” which boasted +10.4% comp growth in Q3. This marked the third consecutive quarter where Our Brands comps outperformed total company comps, highlighting the broad consumer shift toward more bang-for-your-buck products. A similar theme played out for many other grocery chains lately, including Walmart (WMT), whose private brand penetration in food grew around 130 bps yr/yr in OctQ.
KR expects momentum to remain to close out its fiscal year. The company predicts FY23 adjusted EPS of $4.05-4.15, up from $3.95-4.05, and comps of +5.1-5.3%, up from +4.0-4.5%.
Even though it is not showing up in the stock price today, KR’s Q3 numbers illustrate that at-home cooking trends have not gone anywhere, even as restaurants return to regular operating hours and traffic continues to improve. KR’s results also stand out when considering that competition has only intensified, with the largest grocery retailer, WMT, commenting earlier this month that it continued to gain market share. Members-only warehouse BJ’s Wholesale (BJ) also noted that it expanded its market share during OctQ.
Bottom line, KR’s ACI merger may add a layer of volatility over the next year as regulatory scrutiny could stoke big swings on a day-to-day basis. However, we still see KR as a solid choice during an inflationary and rising rates environment, as these dynamics should help sustain strong eat-at-home trends.
