Kroger's (KR) fiscal Q2 results were "more balanced" than the miss in comparable sales suggests, UBS said in a Monday note.

Identical sales excluding fuel rose 0.2%, falling short of UBS expectations and the market's anticipated range of 0.5% to 0.8%, UBS analysts noted. However, they said the earnings outcome was "notably better than feared," as adjusted EPS surpassed both UBS and consensus estimates.

The quality of the beat was also "reasonably constructive," driven by better-than-expected margin performance, specifically the company's first-in-first-out gross margin expanding by about 13 basis points despite anticipated modest pressure, the analysts said.

While Kroger's revenue growth remains challenged, it is finding ways to support profitability while navigating a challenging operating environment through operational execution, sourcing initiatives, and improvements in higher-margin businesses, according to the note. The company continues to "demonstrate greater flexibility within its earnings model" than previously assumed, the analysts said.

UBS kept the company's stock rating at neutral and price target at $63.

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