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Kroger (KR +5%) is adding decent gains today after squeezing out a bottom-line beat in Q2 (Jul) on another quarter of nearly flat yr/yr revenue growth. The pure grocery chain operator, currently in a court battle over its proposed $25 bln takeover of Albertsons (ACI), may not have delivered a blowout report. However, KR rang up many uplifting trends during the quarter, reflecting improving consumer sentiment as inflation slows.

• KR's headline earnings and sales numbers were adequate, delivering adjusted EPS of $0.93, a minor dip from $0.96 in the year-ago period, and revs of $33.91 bln, a 0.2% bump yr/yr. More importantly, identical sales without fuel climbed by +1.2% in Q2, a decent uptick from the +0.5% posted in Q1 (Apr).
• Management mentioned last quarter that as inflation moderates, customer sentiment should improve. Monthly CPI reports throughout Q2 showed food at home prices ticking up by just 0.1% at the most, slower than highs of +0.4% in food away from home prices. After the August CPI report displayed a 0.0% jump in at-home food prices, Q3 (Oct) may be off to a positive start.
• Almost no change in food at home prices throughout Q2 and into August does not mean that KR's inflation-related headwinds have cleared. Budget-conscious households continue to throttle spending as the quarter progresses. Meanwhile, other customer segments are shifting habits, reducing basket sizes and focusing on essentials.
• At the same time, this value-seeking behavior may be spurring increased traffic into stores of KR's competitors. Prominent merchants like Walmart (WMT) and Costco (COST) are notching healthy gains across their grocery categories. COST's recent August comp data revealed mid-single-digit gains in food and sundries and high-single-digit growth in fresh food. Last week, Walmart mentioned that more customers are buying groceries, among other household items, showcasing its ability to help shoppers consolidate trips that can stretch their dollars.
• Still, KR stated that it is winning households. Its private label brands are helping differentiate itself from other grocers while boosting margins, with FIFO gross margins expanding by 42 bps yr/yr in Q2. Following accelerating comp growth through two quarters, KR felt confident lifting the low end of its FY25 (Jan) comp guidance to +0.75-1.75% from +0.25-1.75%. Also, despite continuing to operate through elevated economic uncertainty, KR reiterated its FY25 adjusted EPS forecast of $4.30-4.50.
  • Regarding the pending merger with ACI, closing arguments are expected over the next few days. KR commented that it remains committed to closing the merger.

KR's improved performance in Q2 showcased its structurally sound position within the grocery industry, maintaining competitive pricing and offerings versus its larger counterparts. As KR nears the close of the FTC's preliminary injunction hearing, the ACI merger overhang may finally have clarity, allowing KR to maintain its upward momentum today. Still, dynamic trends among shoppers keep concerns relatively high for at least the short term and can lead to increased volatility quarter-to-quarter.