Kroger might give merger ambitions a rest if Albertsons deal fails

What’s next for Kroger if the Albertsons merger deal is rejected by the courts? 

Kroger Chairman and CEO Rodney McMullen said it might not return to the market for more acquisition attempts. 

McMullen made few comments about the three antitrust cases concerning its proposed $24.6 billion merger with Albertsons during the company's Q3 earnings call Thursday, but reiterated that the combined retailers would “provide customers with an even better experience.”

“If you look at the balance sheet capacity that we have, there's probably nothing else that would be transformational that would use the balance sheet capacity that we would have, so I don't know that we would be out there trying to find what's the next Albertsons,” McMullen said. “We've always made sure that we don't need to do mergers to make our business successful, and that was one of the reasons that we've always been proud of what Kroger has done.”

He added that if the merger fails, Kroger will continue to explore ways to grow the business. Acquisition is one of those methods of growing the business, he said, “but we try to make sure that we only do a merger when it makes sense, and we're not chasing something and we won't get in a position where we are having to chase something.”  

Kroger stock dipped slightly but then quickly rebounded Thursday morning, following the release of the earnings report that showed the grocer missed revenue expectations by 2% and a nearly 1% decline in revenue from a year ago. 

Earnings of $0.98 per share on revenue of $33.6 billion for the quarter lagged behind the $34 billion reported for the same period a year ago. Consensus earnings estimates by analysis came in higher at $0.98 per share on revenue of $34.30 billion, according to Earnings Whispers. 

That decline was driven by underperforming fuel sales due to the lower price of gas per gallon compared to a year ago, the company said in the report.

Removing fuel from the equation, Kroger enjoyed identical sales growth of 2.3%, the retailer reported. Poor performance from the grocery giant’s gas stations was offset by strong pharmacy and digital sales, Chief Financial Officer Todd Foley said in the earnings call. 

Kroger also continued the growth of its private-label brands, the company said, noting that its Our Brands products “outpaced total grocery sales growth” for the quarter. The grocer introduced 226 private-label products during the quarter. 

In 2023, data analytics firm Numerator identified Kroger’s Smart Way brand as the fastest-growing private-label brand on the market. McMullen said Kroger recently refined its brand structure to “optimize the portfolio and ensure each brand plays a unique role on the shelf.”

“The successful addition of Smart Way, our new opening price point brand, played an important role in rounding out our multi-tiered portfolio and offering an attractive alternative to national brands at every price point,” McMullen said. Kroger has also updated designs and packaging “to reinforce our longstanding guarantee of quality and freshness,” he said. 

Digital sales were up by 18% year over year, due to the strength of the retailer’s customer fulfillment centers. In July, Kroger announced the expansion of its relationship with Ocado Group, a U.K.-based online grocer and tech company that runs automated robotic warehouse technology. 

The boost in online orders fulfilled via delivery was also aided by Kroger’s partnership with Disney, which entitles new members of its loyalty program, Kroger Boost, to receive a subscription to Disney+, Hulu, or ESPN+ with an annual membership.  

Strong performance in Kroger’s core pharmacy business was driven by growth in the sale of GLP-1 medications such as Ozempic, as well as growth in the retailer’s vaccinations business.  

“Our vaccine efforts are leading to new patient scripts, which is important, as these customers are more likely to become loyal households and spend more across the store,” Kroger Chairman and CEO Rodney McMullen said in the earnings call. 

While the grocery giant said its pharmacy business was strong for the quarter, Kroger took a $340 million revenue hit due to the $464 million sale of specialty pharmacy business on Oct. 4 to CerelonRX, a subsidiary of Elevance Health. Annualized sales are expected to be roughly $3 billion lower as a result, Kroger said in its earnings statement. 

“As a result, the sale of the business increased both Kroger's gross margin and operating, general and administrative costs as a rate of sales. It had no material effect on operating profit,” the earnings report noted. 

Excluding both fuel and pharmacy sales for the quarter, sales increased 2.7% compared to a year ago. 

McMullen said Kroger is focused on “growing volumes, utilizing automation, and introducing new technology that will create efficiency gain” to narrow the gap between online and in-store purchases. “Narrowing that gap will generate meaningful operating margin benefits and help drive shareholder value over the next several years,” he said. 

The grocer updated its outlook for fiscal year 2025, predicting earnings of $4.35 to $4.45 per share. The previous outlook put earnings at $4.30 to $4.50 per share. Earnings Whispers reported a consensus earnings estimate of $4.46 per share for the year ending Jan. 31, 2025.