Kroger will report second-quarter earnings on Thursday before the market opens. The report comes as the supermarket giant is fighting in court to defend its $25 billion merger with rival Albertsons. The antitrust hearing started on Aug. 26, and could wrap up as early as Friday or next week.
Grocery stores are getting squeezed by inflation and rising food prices on the one side, and big-box and online retailers on the other side. The outcome of the lawsuit could significantly influence Kroger's outlook and how it competes in the future.
For the three months ended on Aug. 17, analysts polled by FactSet expect Kroger to post 91 cents in earnings per share, down 5% from a year ago. Sales are expected to improve 0.7% to $34.1 billion. According to FactSet, consensus target price for the stock currently sits at $58.38, implying a 12% upside from Wednesday's close.
Kroger and Albertsons first proposed joining hands in 2022. The deal soon became a major target of antitrust regulators, who argue that the combined company would make up too large of a market share, especially in certain local markets.
The Federal Trade Commission sued to block the deal, saying it would eliminate competition, drive up grocery prices, and hurt the bargaining power of workers.
Meanwhile, the companies argue the merger would help them cut operating costs and better compete with rivals outside the traditionally defined supermarket industry, such as supercenters, club stores, and e-commerce platforms.
To assuage regulators' concerns, the companies plan to divest hundreds of stores to C&S Wholesale Grocers. Last month, Kroger also said it'll invest up to $1 billion to reduce prices for consumers if the deal could go through, double the previously promised $500 million.
Last week in court, Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran highlighted their commitment to lower prices and protect union jobs.
A federal judge is expected to decide whether to grant the FTC's request for a preliminary injunction to delay the deal while it builds a case against the deal before an in-house administrative law judge.
In a Monday note, BMO analyst Kelly Bania forecasted a 70% likelihood that the transaction could be blocked. Bania noted the addition to the FTC's argument that it still finds the merger violates its market concentration guidelines even when considering non-traditional competitors.
Albertsons CEO Sankaran said the firm will have to consider closing stores or laying off workers if a judge rejects Kroger's planned takeover.
Kroger is in better shape. Bania says Kroger's outlook is "more stable than feared" and expects the firm to report earnings growth regardless if the deal happens or not. The analyst has a $60 target price for the stock over the next 12 months.
Although inflation has slowed down, food industry sales have continued to grow this year. According to the Census Bureau, food and beverage stores' retail sales increased 2.9% in May from a year ago, 1.9% in June, and 2.5% in July.
Recent earnings reports from other grocery stores, including Grocery Outlet Holding and Sprouts' Farmers Market, also indicated stable grocery demand, wrote Telsey Advisory analyst Joe Feldman, who believes Kroger is well positioned to stand out in the future.
Kroger is leveraging its growing food business and loyalty data to increase opportunities beyond food, wrote Feldman. This includes digital, fuel, health and wellness, personal finance, as well as advertising and media.
"These new growth areas -- especially personal finance and advertising/media -- are significantly more profitable than core food retail," the analyst wrote in a Monday note. Feldman has an Outperform rating for the stock and a 12-month price target of $62.
On Thursday's earnings call, Feldman expects Kroger management to provide an update on the status of the antitrust case and timing of the court's decision.