Latest Developments:
Kroger reported 3Q24 sales of $33.91 billion (+0.17% y/y) and revised its FY24 guidance upwards, forecasting 1.35% growth in retail sales. Margins improved notably, with gross margin at 22.56% (vs. 21.77% y/y) and operating margin climbing to 4.62% (vs. 0.70% y/y). While the sale of its pharmacy business will reduce topline by $3 billion annually, it is expected to have no material impact on operating profit.

Investment Case:
Kroger is leveraging technology, such as RFID tags and AI, to enhance operational efficiency and improve margins. Its private label brand, Our Brands, continues to outpace national brands, contributing 600-800 basis points higher to profitability. Even without the merger, Kroger consistently returns value to shareholders, with $16.78 billion returned over the past decade through dividends and buybacks.

Valuation:
A DCF model implies an intrinsic value of $88, representing a 49% upside if Kroger improves margins by 10bps annually through FY2028. The valuation excludes potential synergies from the Albertsons merger, which could add $1.5 billion in efficiencies, significantly enhancing shareholder returns.

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