Kroger (KR) Earnings Preview: Modest Growth Expected as Stock Remains in Correction

The Kroger Co. (KR), one of the nation's largest supermarket chains, is preparing to release their earnings report today. However, a complex picture emerges, marked by leadership changes, strategic store closures, and evolving consumer behavior.

Analysts expect Kroger to report an EPS of $1.00, up from $0.93 in the same quarter last year, indicating modest earnings growth. Revenue is projected at approximately $34.15 billion, representing a 0.71% year-over-year increase as the company continues to face a competitive but stable grocery retail landscape.

The company's recent first-quarter earnings report, released in June, painted a picture of resilience amidst economic uncertainty. While revenue slightly missed expectations at $45.12 billion against an anticipated $45.19 billion, adjusted earnings per share (EPS) exceeded forecasts, coming in at $1.49 versus the projected $1.46.

Identical sales, excluding fuel, grew a healthy 3.2% year-over-year, fueled by strong performances in pharmacy, e-commerce, and fresh groceries. Digital sales surged by 15%, showcasing Kroger's ability to adapt to evolving consumer preferences.

However, Kroger faces significant headwinds. The unexpected resignation of long-time CEO Rodney McMullen in March, following an internal investigation into violations of the company's business ethics policy, has created a leadership vacuum. Interim CEO Ronald Sargent is at the helm while the board searches for a permanent successor. Such leadership transitions inevitably introduce uncertainty and can weigh on market sentiment.

Adding to the complexity, Kroger announced plans to close approximately 60 stores across the United States over the next 18 months. While management framed this as a strategic move to enhance profitability by consolidating sales into nearby locations and focusing on high-growth areas with over 30 planned new stores, store closures can disrupt local communities and raise concerns about the company's long-term growth trajectory.

Furthermore, Kroger's legal battles have added another layer of complexity. The $110 million settlement with the state of Kentucky to resolve allegations related to the opioid crisis, while not an admission of wrongdoing, carries financial implications and potentially tarnishes the company's reputation. The blocked merger with Albertsons in December 2024, intended to create a supermarket giant, deprived Kroger of a major strategic growth opportunity.

While the market seems to believe Kroger's focus on private-label brands signals strength, a contrarian might argue this strategy highlights a deeper problem: a lack of brand loyalty. Consumers are increasingly choosing Kroger's private-label offerings because they can't afford or don't perceive sufficient value in national brands. This “race to the bottom” could erode profit margins in the long run.

While cost-cutting measures and strategic store closures may provide short-term gains, they don't address the fundamental issue of attracting and retaining loyal customers willing to pay a premium for quality and brand recognition. The increased coupon usage also points towards a consumer base that is hyper-sensitive to pricing, which may not be a sustainable model for long-term growth if inflation eases and consumers revert to pre-pandemic spending habits.