Is Kroger Stock a Buy After Earnings?

The leading grocery store chain posted excellent first quarter earnings.

Consumer staple stocks have performed relatively well this year, outperforming the broader S&P 500. But stocks within this broad sector, which includes companies that provide essential goods and services, have been hit and miss.

One of the top performers this year has been Kroger (NYSE:KR), the leading grocery store chain in the country. Grocery stores in general have been hit with higher tariffs on goods, but companies, like Kroger, are working to minimize the impact to attract shoppers.

It seems to be working as Kroger exceeded sales and earnings targets and increased its sales guidance for the rest of the fiscal year.

In its fiscal first quarter earnings, released Friday morning, Kroger posted sales that were roughly flat year-over-year at $45.12 billion. This came in a tad below consensus estimates of $45.16 billion. However, identical sales, or same-store sales, surprised to the upside, rising 3.2% compared to 0.5% in the same quarter a year ago. This was better than estimates of 2.4% identical sales growth.

Net earnings were also flat at $1.29 per share, while adjusted earnings, which includes adjustments for store closures and other factors, were $1.49 per share, up from $1.43 per share in Q1 a year ago. This was better than estimates of $1.45 per share.

The results pushed Kroger stock some 9% higher on Friday, up to about $71.50 per share. Kroger stock has been one of the leading consumer staples in the S&P 500, up 16% YTD and 42% over the past year.

Limited tariff impacts

Kroger’s strong performance comes amid some recent turmoil, as its CEO, Rodney McMullen, resigned in March following an internal investigation into his personal conduct. Also, in January, its planned merger with Albertsons (NYSE:ACI) fell apart after the Federal Trade Commission expressed concerns about it creating a monopoly. Then Alberstons backed out of the deal and sued Kroger for what it called a breach of the merger agreement.

Also, in April, Kroger, under interim CEO Ronald Sargent, had to deal with the new tariff regime. That’s been a challenge, but Kroger has shown a commitment to keeping prices low and competing for cautious consumers. It has been doing that by lowering prices on some 2,000 items and promoting its cheaper internal brands.

“We are growing sales by offering high-quality products to customers at all budget levels. This quarter, our brands grew faster than national brands for the seventh consecutive quarter,” Sargent said on the earnings call. “Simple Truth and Private Selection led our sales growth, highlighting that customers want premium products while also spending less.”

Sargent also said that as a domestic food producer, it anticipates a smaller impact from tariffs than its competitors. And where tariffs could have an impact, the company is looking for ways to avoid raising prices, calling it a last resort option.

“Tariffs have not had a material impact on our business so far, and given what we know today, we do not expect them to going forward,” Sargent said on the call.

Time to buy?

Kroger expects the forward momentum to continue, and in fact, it raised its identical sales guidance for the rest of the year to a range of 2.35% to 3.25% growth. That is up from the previous range of 2% to 3% growth. This is due to expected growth in pharmacy and grocery.

It also maintained its full year projections for adjusted operating profit of $4.7 billion to $4.9 billion and its adjusted earnings of $4.60 to $4.80 per share.

Kroger should also benefit from its plan to close roughly 60 underperforming stores over the next 18 months and open north of 30 in more strategic locations this year. Ultimately, Sargent said this should improve profitability.

In a time of uncertainty, Kroger seems like it is taking the right steps to keep its customers and gain market share. With a low valuation, trading at 17 times earnings and 14 times forward earnings, this consumer staple looks well-positioned for steady growth in unsteady times.