The Kroger Co. (KR - Free Report) stock soared to new highs after it posted strong fourth-quarter results in early March and offered solid guidance as it adapts to supply chain bottlenecks and rising prices.

The grocery chain powerhouse thrived during the heart of the pandemic and now Kroger is benefitting from price-conscious shoppers trying to eat out less amid 40-year high inflation. KR’s digital and e-commerce efforts are poised to continue to drive growth. And Wall Street might be set to keep buying Kroger during the current market and economic turmoil for its stability, dividend, and more.
 

Never Going Out of Style

Kroger is the largest supermarket chain in the U.S. and one of the biggest in the world. KR operates under multiple brands across roughly 35 states, with over 2,700 supermarkets and multi-department store locations. Many of Kroger’s stores feature pharmacies and gas stations.

Brick and mortar are fading within some aspects of retail, but it continues to thrive in the grocery and supermarket segment. Kroger has, of course, spent the last several years working to improve and beef up its e-commerce business, like nearly everyone else in the retail industry. These efforts include expanded online pickup and delivery.

Kroger is actively building out its network of high-tech warehouses/fulfillment centers. The company also operates dozens of food production and manufacturing facilities to help produce its own private-label products that provide value for customers and help boost margins.

Image Source: Zacks Investment Research
 

Recent Results & Outlook

Shopping patterns benefited Kroger and others such as Target during the pandemic, as consumers avoided eating out and tried to have plenty of food stocked up. KR’s 2020 sales climbed over 8%. Even as people returned to their more normal lives, groceries are still a staple that is never going out of style.

As the pandemic faded, Kroger then benefitted from risings costs across the economy that spurred many shoppers to cook and eat at home more often. KR’s 2021 revenue popped 4% to $138 billion, with its digital sales up 113% on a two-year stack. The company has been able to pass its higher costs onto consumers as well, with its adjusted earnings up 6% last year.  

The Cincinnati-based chain’s same-store sales popped 4% in Q4, with it up 15% vs. its fourth-quarter 2019 levels. KR’s adjusted fourth-quarter earnings jumped over 12% to help it blow away the Zacks consensus EPS by 25%. The big bottom-line beat is part of a 22% average outperformance in the trailing four quarters.

Crucially, Kroger upped its 2022 guidance as it sees customers flocking to its stores. KR is poised to keep successfully navigating rising costs across the entire supply chain, while methodically and strategically raising its prices.

Kroger’s FY22 consensus earnings estimate has soared 10% since its report, with FY23’s 11.3% higher. Shoppers are gravitating toward its higher-margin and lower-priced store brands while upping their engagement with coupons. Luckily, KR executives said they see inflation moderating in the second half of 2022.

Kroger faces tough-to-compete against years. Still, Zacks estimates call for its revenue to climb 2.4% both this year and next to reach $144.5 billion in 2023. Meanwhile, its adjusted earnings are projected to pop by 2% in 2022 and 5% in 2023.

(Click on image to enlarge)

Image Source: Zacks Investment Research
 

Efforts & Other Fundamentals

Kroger is actively raising its wages to help compete for talent alongside Target, Amazon, Walmart, and many others. KR is also upping its efforts to fight against food waste and hunger, while actively attempting to improve quality and address issues such as animal treatment within its supply chains. These might raise costs, but they will likely help improve the company over the long haul.

Wall Street can get behind these broader goals because KR is actively boosting its dividend and buying back stock. It's current $0.21 a share quarterly payout is up 17% YoY. The company has now raised its dividend for 15 years in a row and plans to “deliver strong and sustainable total shareholder returns of 8% to 11% over time,” while also deploying its free cash flow to other efforts.

Kroger’s dividend (next payable on June 1, ex-dividend May 12) yield sits at 1.50% to top its industry and Walmart’s (WMT - Free Report) 1.41% and match Target (TGT - Free Report). Some of these fundamentals are what attracted Warren Buffett and Berkshire Hathaway to Kroger back in the fourth quarter of 2019. And KR’s valuation, which we will touch on next, is enticing.

(Click on image to enlarge)

Image Source: Zacks Investment Research
 

Price & Valuation

Kroger shares have rather easily outpaced its highly-ranked Retail-Supermarkets industry over the decade, up 475% vs. 218% (this also tops the S&P 500’s 345%). This includes a downward stretch, but KR has now ripped off a 135% surge in the last three years. Wall Street has jumped heavily into the stock in the last six months as the tech trade fades and investors clamor for value and dividends.

KR has climbed 45% in the last six months vs. its industry’s 10% pop and the market’s 6% drop. This includes a big post-earnings release jump that sent it to brand new highs in early March. Kroger inched higher after that run and now trades about 10% below its recent highs at roughly $56 a share.

Kroger currently trades at 14.9X forward 12-month earnings. This marks a 30% discount to the Retail-Supermarkets industry and 31% value vs. the broader Zacks Retail-Wholesale Sector. On top of that, Kroger trades 24% beneath its own highs and not too far above its median over the last decade.

(Click on image to enlarge)

Image Source: Zacks Investment Research
 

Bottom Line

Kroger’s improved bottom-line outlook helps it grab a Zacks Rank #1 (Strong Buy) right now. It seems like a solid candidate to buy both during the current market conditions and as a longer-term retail play because people will never stop needing full-service supermarkets. And during these times, keeping it simple might be the most thoughtful option.