Kroger set to report Q3 results. Here’s everything you need to know

The Kroger Co. (NYSE: KR), a leading grocery retailer that operates both in-store and online, will be reporting earnings this week. The company, which is preparing to acquire rival retailer Albertsons, bets on its successful business model to navigate through challenges like economic uncertainty and weak consumer sentiment.

The supermarket chain’s stock recently slipped to the lowest level of the year, after reversing the positive momentum seen in the first half. However, it changed course since then and is trading close to the twelve-month average. The stock is not expensive, but this might not be the right time to invest either given the uncertainties related to the company’s future performance and the challenging market environment. 

Kroger’s successful value-creation model should allow it to deliver stable shareholder returns. The company has been paying quarterly dividends for more than a decade now, with regular hikes. The current yield of 2.6% is higher than the S&P 500 average.

Q3 Report Due

Kroger’s third-quarter report is slated for release on November 30, at 8:00 a.m. ET. It is widely expected that the company would report adjusted earnings of $0.90 per share, compared to the $0.88/share it earned in the July quarter. The estimated revenue is $33.89 billion, which is slightly lower than the $34.2 billion sales reported last year. In a recent statement, the company said it is looking for third-quarter adjusted earnings in line with the prior year.

Inflation, interest rate hikes, and reduced government aid continue to put pressure on consumers’ spending power, forcing retailers to offer discounts. To deal with the situation, Kroger has adopted measures like expanding its alternative-profit businesses, managing costs, and collaborating with vendors to give value to customers. The focus is on easing the strain on family budgets through promotional prices, as customers weigh multiple factors when it comes to food-at-home spending.

Margins

Meanwhile, lower volumes of staples and increased promotions will likely weigh on margins in the remainder of the year and beyond. Though Kroger is a late entrant to e-commerce, the company has gained a strong foothold in that area as it keeps attracting customers to the online platform.

From Kroger’s Q2 2023 Earnings Call:

“To support our customers, we are delivering increased value through our robust Our Brands portfolio, personalized digital offers, fuel rewards, and loyalty discounts, including weekly specials and yellow tag promotions. Economic instability continues to impact customer segments differently. We are seeing this in their shopping behaviors. Higher-income households continue to engage more deeply with us, enjoying our customer experience with zero compromise on convenience, quality, and value.”

The company’s full-year guidance reflects its optimistic view about performance in the second half – adjusted earnings per share and operating profit are expected to increase year-over-year to around $4.53 and $5 billion, respectively, in FY23. It is looking for adjusted free cash flows of about $2.6 billion.

In the past four years, adjusted profit beat Wall Street’s expectations in every quarter, including in the most recent quarter. However, second-quarter revenues slightly missed estimates, continuing the recent trend. Sales and earnings rose modestly to $33.9 billion and $0.96 per share respectively in Q2. Identical sales growth, excluding fuel, decelerated for the third time in a row and came in at 1%.

Albertsons Deal

Earlier, Kroger signed an agreement to acquire Albertsons in a $25 billion deal that was announced more than a year ago. The companies will be offloading hundreds of stores as part of the merger, to secure antitrust clearance. The transaction is pending regulatory approval and is expected to close in 2024.

Shares of Kroger traded slightly higher early Monday, after closing the previous session higher. The stock is down 7% since last year.