By Jacob Sonenshine

Kroger stock has fallen out of favor in recent months as investor hunger for risk returned. Its upcoming earnings report should convince investors that there are plenty of gains to be had sitting on its shelves.

After an early 2025 run, Kroger shares have fallen about 9% from their April high of $72.98 to a recent $66.34. The loss isn't about anything the grocery store operator did wrong, but about what it is -- a consumer-staples stock. Those companies tend to do well when markets are in turmoil and safety is in fashion, but less so when the bounce finally comes. And after a tough start to the year, the bounce finally came in a big way.

But there's nothing wrong with Kroger, which reports earnings on June 12. Though the stock has fallen, analysts haven't reduced their earnings estimates during the dip, a sign that sentiment, not fundamentals, is responsible for the decline. All that's done is give investors a chance to buy the stock at a cheaper valuation. Kroger stock trades at 13.6 times 12-month forward earnings per share, down from its 2025 peak of just over 15 times. "We find the risk reward appealing at a reasonable 13x," writes Evercore ISI analyst Greg Melich.

That multiple leaves plenty of room for the stock to gain as long as its first-quarter earnings report doesn't disappoint. Analysts expect same-store sales to grow by 2.4%, driven mostly by mild price increases, bringing total revenue to $45.27 billion, according to FactSet. Kroger doesn't have a tariff problem, either. Only a tenth of the company's products come from overseas, with just 1% coming from China, according to Melius Research analyst Jacob Aiken-Phillips. That fact could lift the gross profit margin slightly, though expected earnings of $1.45 per share would be up only 1.4% from the same quarter one year ago because of investments in employees and new technology assets.

The stock's performance hinges on the company's outlook for the rest of the year. Management said on its fourth-quarter earnings call that it expects volume growth to improve later this year. That's realistic given that Walmart guided in May for full-year sales growth of 3.5%, at the midpoint of its previous range. Kroger isn't far behind, currently guiding for 2.5% growth for "identical sales," or sales excluding fuel, which accounts for a small portion of total revenue.

That forecast could prove conservative. Management's long-term guidance is for annual sales growth of 3%, driven by several initiatives. Kroger is taking advantage of the dwindling number of pharmacies to build its own inside its supermarkets. This could help Kroger gain market share as it attracts new customers to its stores, and it's why Aiken-Phillips upgraded the stock to Hold from Sell in late May.

Digital sales, which were a small portion of total revenue in 2024 but grew 18%, should continue to increase as consumers increasingly buy groceries online before picking them up in stores or having them delivered. That's a trend Kroger hopes continues because online shoppers spend at least three times more per order than walk-in shoppers, the company said.

The digital business, which doesn't cost as much to build and run as the traditional bricks-and-mortar business, can also help boost margins. That, combined with the company's roughly $1 billion of share buybacks analysts widely expect, could boost earnings by 8% next year, while leaving enough left over to raise its dividend, currently 33 cents a quarter for a yield of 2%.

"Kroger can hit its 8%-11% total shareholder return targets," writes BMO analyst Kelly Bania, who rates the stock Market Perform with a $70 price target.

In other words, it's time to go shopping.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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June 05, 2025 01:30 ET (05:30 GMT)

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