Merger Chaos and Missed Targets Hit Kroger (But Warren Is Still Loading Up His Buffett of Shares?)

Krogers Q3 earnings? About as impressive as it was tragic.  The grocery giant missed on revenue, barely scraped by on earnings, and is still tangled in the regulatory sh*t show over its $20 billion Albertsons merger. Add in a stock that’s on the fences, and you’ve got a company trying to convince investors, “Everythings fine,” while the store’s on fire. 

(Source: Giphy) 

In short, Kroger’s not-so-stellar quarter started with revenue coming in at 33.63 billion, missing Wall Street’s $34.2 billion target and dropping 0.9% year-over-year. Why? First, Kroger offloaded its specialty pharmacy business in October, cutting out $340 million in sales. Second, fuel sales were down because gas prices finally gave everyone a break—for Kroger, that’s bad news (a.k.a. Revenue killer). 

On the other end, adjusted earnings per share came in at $0.98—woohoo, a whole penny above expectations while net income settled at $618 million, or $0.84 per share, down from last year’s $0.88. Cool story, but not exactly blowing anyone away. On the bright side though, identical sales  (excluding fuel) rose 2.3%, proving that people are still shopping—even if it’s not enough to impress analysts. 

(Source: MarketWatch) 

In addition, Kroger’s gross margin ticked up to 22.9%, thanks to a 51-basis-point boost in its FIFO margin (excluding fuel). Translation: Kroger’s squeezing more profit out of groceries, which is great if you’re trying to keep Wall Street happy while shoppers hunt for bargains like it’s an Olympic sport. However the bane in Krogers existence currently all comes down to the atrocious Albertsons merger.

Simply put, Kroger’s $20 billion blockbuster deal is still in regulatory purgatory, and the FTC is not playing nice. Regulators are convinced this will wreck competition and screw over consumers. Kroger, of course, is trying to spin it like the deal will solve world hunger, lower prices, save jobs, and maybe even make your avocados ripen faster. CEO Rodney McMullen is doubling down, saying, “We remain confident in the facts and the strength of our position.” Which is great and all, but confidence doesn’t mean squat when the FTC is sharpening its knives.

(Source: Grocery Drive) 

Meanwhile, Warren Buffett is over here loading his cart with Kroger shares. Berkshire Hathaway now owns 50 million shares, up 15% from its last filing. Meaning, while Kroger’s earnings wasn’t excitedly stealing the show, Grandpa Warren is betting bigly on Kroger (maybe there’s more to this than meets the eye here? Or maybe it’s just insider information a really good guess. Who knows). 

For now though, in order to keep the lights on, Kroger just hit the pause button on its stock buyback program to focus on paying down debt. Makes sense considering it just burned $186 million on merger-related costs this quarter. But the bottom line to all of this is that even though Kroger’s Q3 wasn’t a train wreck, it also wasn’t a win.

(Source: Giphy) 

Revenue missed, profits were lukewarm, and  the Albertsons merger is a regulatory minefield that could blow up any second. Investors are holding their breath, and the stock’s down 0.2%. No drama, no excitement, just a whole lot of wait and see. If the FTC blocks this deal, Kroger’s big $20 billion play might end up as nothing more than aisle clutter.

So yeah, if you’re a Kroger holder, then there’s a lot to keep an eye on. But in the meantime, place your bets accordingly and filter this all through a brain-cell. Translation: Just because Warren is loading up his Buffett with Kroger shares doesn’t necessarily mean you should too. Aaaaand thanks for coming to my Ted Talk. As always, stay safe and stay frosty, friends! Until next time…

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Stocks.News does not hold positions in companies mentioned in the article.