Shares of Kroger (KR 0.14%) climbed 15.2% in March, according to data provided by S&P Global Market Intelligence. The company smashed Wall Street's earnings estimates, and its surprisingly upbeat forecast caused analysts to revise their forecasts higher.
Kroger's quarterly report was received positively
The grocer reported earnings on March 7, and the stock immediately surged higher. Kroger posted a roughly 1% decrease in "identical sales," which adjusts for the impact of fuel sales, store openings and closures, and the different number of weeks in comparable reporting periods. Quarterly revenue was up more than 6% including fuel. The grocer fell just short of consensus analyst revenue estimates, but it crushed earnings expectations. Its operating profit margin was 3.2% for its fiscal fourth quarter, an 80 basis point improvement over the prior year and well above the full-year 2.1% operating margin.
Image source: Getty Images.
Importantly, Kroger delivered $3.04 billion of free cash flow for the full year 2023, up from $1.48 billion in the prior year. Grocery stores are low-growth, narrow-margin businesses, so cash-flow generation and dividend stability are often the most important factors considered by investors. The company delivered in this regard.
Kroger's 2024 forecast calls for a modest expansion in identical sales with slightly lower free cash flow and adjusted earnings per share. The company calling for reduced profits and free cash flow would seem to be weak guidance, but it was still better than Wall Street had expected. Its abnormally strong performance in 2023 is hard to replicate, so investors were already anticipating a step back. Consensus estimates for 2024 increased after the quarterly report, illustrating the strength of its guidance.
KR Revenue Estimates for Next Fiscal Year data by YCharts
Kroger is a fairly straightforward value stock
Kroger also delivered good news about resolving labor issues that were about to cause a strike that would have impacted nearly 40 locations. That's under 2% of the company's total stores, but any disruption can be material for such a narrow-margin business. This also assuages concerns about potential future labor issues in other states.
Kroger's proposed acquisition of Albertsons has caused frustration for the company's management team. The Federal Trade Commission filed suit to block the merger on antitrust grounds, and that case is being reviewed by federal judges. That combination would deliver increased scale and reduced competition, which would likely be good for margins and cash flows. If the acquisition is allowed to go through, it's likely to cause a modestly positive impact on share price.
Kroger's dividend yield dropped to 2% after its recent gains. Its payout ratio was under 30% last quarter, though the forecast decrease in cash flow will likely drive payout ratio higher in 2024. Growth investors won't find anything interesting here; it's a strong candidate for income investors who want to minimize volatility, thanks to its cheap valuation.
