CINCINNATI — The Kroger Co. is well-positioned in regulatory challenges to its pending $24.6 billion acquisition of fellow supermarket operator Albertsons Cos., Kroger chairman and chief executive officer Rodney McMullen said in reporting fiscal 2024 first-quarter results.
“We are prepared to defend our merger because it will produce meaningful and measurable benefits for customers, for associates and for communities across the country,” McMullen told analysts in a conference call on June 20. “Customers will benefit from lower prices and more choices following the merger close. We have committed to investing $500 million to begin lowering prices day one following close, along with an additional $1.3 billion to improve Albertsons stores.”
Announced in October 2022, the original Kroger-Albertsons merger deal — combining the nation’s first- and second-largest supermarket retailers — aimed to create a company with annual revenue of approximately $210 billion and 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies, 2,015 fuel centers and 710,000 employees in 48 states and the District of Columbia. Kroger received a second request for information from the Federal Trade Commission (FTC) on the proposed merger in December 2022 but continued to expect the deal to close in early 2024, though industry observers had expected that such a large transaction could take up to two years to gain regulatory approval.
In September 2023, Kroger and Albertsons unveiled an agreement to divest 413 stores, eight distribution centers and two offices in 17 states and the District of Columbia to C&S Wholesale Grocers, the nation’s largest privately held grocery distributor. The $1.9 billion transaction also included the sale of five Albertsons private brands (Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro) to C&S. But that deal was deemed as an inadequate antitrust remedy by the FTC, which in February 2024 initiated a lawsuit to block the supermarket merger, reporting that attorneys general of eight states and DC also joined the federal suit.
That led Kroger and Albertson this past April to boost the divestiture deal with C&S to $2.9 billion, including a updated package of 579 stores in 18 states and DC, increased distribution capacity and office facilities, and access to Albertsons’ Signature and O Organics own brands. At the time, the two grocers also iterated their intention to defend the merger in court. The merger transaction remains under review.
“Since we announced the proposed merger back in October of 2022, our associates have done an exceptional job preparing for the integration with Albertsons, while never once taking their eye on off the ball in serving our customers, advancing our strategy, operating our business and driving results,” McMullen said in the first quarter call. “Because of their efforts, we will be prepared to hit the ground running as a combined company, ready to serve more customers from day one.
“As a more general merger update, in April, we announced an expanded divestiture plan with C&S, which directly responds to the concerns raised by federal and state antitrust regulators. Regarding the original agreement, we believe that (store) package switching, which includes a modified and expanded store set and more non-store assets, bolsters Kroger's position in regulatory challenges to the proposed merger, including our upcoming court proceedings. It also positions C&S to be a strong and successful competitor.”
For the first quarter ended May 25, Cincinnati-based Kroger totaled nearly flat net sales of $45.27 billion, up 0.2% from $45.17 billion a year earlier, when the top line rose 1.3%. Excluding fuel, net sales gained 0.6% year over year, the company said. Identical sales excluding gasoline edged up 0.5% from a year ago, when Kroger tallied a 3.5% increase. Digital sales climbed 8%, including delivery sales growth of 17%.
“We're off to a solid start in 2024, reflecting the strength and diversity of our model. Better-than-expected performance from our grocery business helped us manage fuel and health-and-wellness results that were behind expectations,” McMullen said. “Kroger is providing exceptional value and a unique omnichannel experience, which combined with strong store execution led to growth in households and an increase in customer visits. As inflation moderates, we expect customer sentiment to continue improving. But near-term, many customers are managing economic uncertainty.”
Kroger has continued efforts to extend more value to inflation-weary consumers, including price relief, personalized promotions and more options in private label. During the first quarter, the grocer introduced 346 new private label products – including the new Field & Vine brand (regionally grown berries) – and rolled out new packaging for its Simple Truth better-for-you label and completed brand redesigns for its Abound and Pet Pride lines.
“Within our most budget-conscious households, we are starting to see positive momentum, and we grew households in this segment after experiencing declines last year,” noted McMullen. “Historic multiyear inflation across the economy, high interest rates and reduced government benefits disproportionately affected these customers and are influencing their spending behaviors. Kroger's long-standing commitment to low prices and personalized promotions (come) at a time when many of them are needed more than ever. Food at home continues to be the most affordable meal option for customers.”
Month to month, the food-at-home Consumer Price Index (CPI) was flat for May after decreasing 0.2% in April and coming in flat for March and February, according to US Bureau of Labor Statistics (BLS) data. On an annual basis, the food-at-home index was up 1% in May, compared with 1.1% in April, 1.2% in March and 1% in February. In contrast, food away from home inflation was up 0.4% month to month and 4% year over year for May. So far this year, growth in food away from home pricing has averaged over 0.3% month to month and nearly 4.4% year over year, based on BLS monthly CPI reports.
“While food inflation has impacted every meal occasion, inflation in food away from home has been even higher than food at home inflation since 2019,” McMullen said. “We are committed to making sure our customers can enjoy a great meal experience with zero compromise on quality selection, value and convenience. We see a significant growth opportunity to deliver convenient restaurant-quality meals at an attractive value, and we are expanding our ready-to-eat offerings. For example, after we revamped our fried chicken recipe, we created a meal bundle which feeds a family for $3.50 a person, a fraction of what it would cost to eat out at restaurants. That's difficult to beat every day.”
At the bottom line, Kroger reported 2024 first-quarter net earnings (attributable to the company) of $947 million, or $1.29 per diluted share, compared with $962 million, or $1.32 per diluted share, a year earlier. Excluding $143 million in merger-related costs, offset by a held-for-sale income tax adjustment and investment gains, adjusted net earnings were almost $1.05 billion, or $1.43 per diluted share, versus $1.1 billion, or $1.51 per diluted share, in the year-ago period, the company said. Analysts, on average, had projected adjusted EPS of $1.34, with estimates ranging from $1.29 to $1.39, according to LSEG Data & Analytics (formerly Refinitiv).
Kroger held steady on its fiscal 2024 sales and earnings guidance, including adjusted EPS of $4.30 to $4.50 and identical sales growth of 0.25% to 1.75%. Before Kroger’s Q1 report, Wall Street’s consensus estimate was for fiscal 2024 adjusted EPS of $4.43, with projections running from $4.20 to $4.40, according to LSEG.
“We reaffirmed our annual guidance, reflecting both positive momentum we are seeing in our business along with a more cautious customer environment in the near term,” Todd Foley, interim chief financial officer at Kroger, told analysts in the call. “In terms of quarterly cadence, we now expect a decline in adjusted EPS for the second quarter, similar to the rate we observed in the first quarter, as we expect price and pharmacy business profitability pressures to carry over into the second quarter. This reaffirms where we expected to be through both the first half of the year as well as the full fiscal 2024.”