Kroger Earnings: Private-Label Lineup, Effective Promotion Drive Trips and Protect Profitability

Despite inflation’s grip on consumer spending habits, narrow-moat Kroger’s KR first-quarter sales results tracked largely in line with our fiscal 2023 expectations, with profitability better than anticipated. As such, we plan to raise our $54 fair value estimate by a low-single-digit percentage, leaving shares trading at a discount, particularly after a post-print mid-single-digit dip in share price. Although Kroger faces challenges in a price-competitive grocery landscape, we believe investors underestimate the firm’s ability to resonate with consumers through its dynamic private-label offerings and data-driven promotional capabilities, while utilizing scale to extract efficiencies to invest in price. These features underpin the brand asset and cost advantage we see for Kroger.

Identical sales, excluding fuel, popped 3.5%, trending in line with our 2% full-year estimate. Private label sales growth of 4.9% stood out as consumers found favor with Kroger’s value-oriented offerings. Higher-margin private label sales, coupled with reduced supply chain costs, helped boost Kroger’s gross margin rate, excluding fuel, by 21 basis points, despite intense price promotion. In turn, Kroger posted a strong $1.51 in adjusted EPS. As such, management doubled down on its full-year expectation calling for 1%-2% in identical sales, without fuel, growth and $4.45-$4.60 in adjusted EPS. With the solid performance, we plan to bump our $4.45 EPS estimate to the higher end of the range.

Kroger was able to work with suppliers and leverage its discounting platform to drive trips (sales made on promotion jumped 380 basis points). Even so, despite gaining share with mainstream and higher-income consumers (according to management), we suspect lower-income consumers may have been lured by discount operators like wide-moat Walmart, given its 7.4% first-quarter U.S. comparable sales growth. Still, we believe Kroger’s newer opening price-point brand Smart Way should help retain sensitive consumers.