The U.S. retail sector has displayed a mix of resilience and caution this year, as consumer spending continues to recover while balancing tighter budgets and shifting toward value-oriented grocery and discount chains. In this environment, Ohio-based food and drug retailer The Kroger Co. (KR) heads into its Fiscal Q2 reporting season—with earnings scheduled for September 11, just before the opening bell—supported by solid operational momentum and its defensive business model.
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Kroger’s recent performance, although not spectacular, indicates that the company is trading close to its historical multiples, albeit at a justified discount compared to its main peers. Meanwhile, the prospect of potentially lower interest rates through the remainder of this year and into next may limit upside, even if Q2 earnings slightly exceed expectations, as some retailer peers have already delivered decent organic growth this earnings season.
Given a less enthusiastic macro environment for defensive stocks in the second half of the year, I believe that while Q2 is likely to reinforce Kroger’s ability to deliver attractive total shareholder returns, KR remains a Hold, and may continue to struggle to outperform the broader market in the near term.
Kroger’s Strategy Shines Amid Trade-Down Trends
Over the past five years, Kroger’s returns have been largely in line with the broader market, with a very low five-year beta of 0.58—typical of a defensive, stable stock. History shows that for those who own Kroger shares, this hasn’t been the type of investment that tends to be volatile or deliver returns well above the market trend.
Given that sales are relatively stable, Kroger usually outperforms during downturns or recessions, when investors flock to defensive assets, but lags in strong bull markets. This has been the case over the past three years of broader market euphoria, with Kroger returning roughly 45.5% (including dividends) versus 71% for the S&P 500’s (SPX) total return.
In theory, the most attractive times to go long Kroger are during periods of macroeconomic stress, when consumer confidence dips and inflation rises. That pattern has played out over the past two years, as KR shares climbed roughly 50%. As is typical for a defensive stock, Kroger also tends to outperform when interest rates are high. Recent hints of a dovish Fed stance through the end of the year may be less favorable for KR, as investors may lean toward growth stocks instead.
Overall, momentum this year in the grocery channel has been positive, with the sector continuing to gain share despite fears of more restrained consumer spending. Specifically for Kroger, in Q1, identical sales (excluding fuel) jumped 3.2% year-over-year, above the 2.3% that analysts expected. The company also raised identical-sales guidance by 0.25% compared with the previous quarter. Even better, Kroger has not only grown in sales but also improved cost management, with gross margins rising 100 bps year-over-year to 23%, supported by divestitures and optimized supply chain operations.
For context, during Q2, key domestic peers Walmart (WMT) and Dollar General (DG) reported comp sales growth of 4.6% and 2.8%, respectively, signaling a “trade-down” trend as consumers—even those with higher disposable income—tighten their budgets and shift toward grocers and discounters.
Kroger Set to Deliver on Operational Strength in Q2
As one of the last major retailers to report this season, expectations for Kroger’s fiscal Q2 are bullish, based on peer performance. Analysts expect EPS of $1, a 7.5% year-over-year increase, and revenues of $34.1 billion, essentially flat versus Q2 last year. Interestingly, over the past six months, these top and bottom-line expectations have been revised upward by nearly 0.5% and 1%, which is notable for a company with a “steady and slow” growth model.
Unlike Walmart, Kroger has less exposure to general merchandise and therefore less risk from trade-war-driven import costs. Its core focus on food, private label, and pharmacy positions the company well to benefit from the market’s trade-down trend. While Walmart can sometimes lure away Kroger customers on price and convenience, Kroger’s store mix and product focus may help it post meaningful growth in Q2. Walmart’s growth is tilted toward grocery (lower margins) and general merchandise (which has softened), whereas Kroger’s lighter exposure to general merchandise reduces potential drag.
Given this setup, solid positive comp sales growth for Kroger seems likely, probably in the 2%–4% range year-over-year, similar to its main peers. Food inflation has remained relatively stable, below 3%—2.9% in July, which could help ease margin pressure slightly.
Kroger has also seen strong digital sales growth, up 15% year-over-year in the last quarter, and the company is aiming for total shareholder returns (dividends, buybacks, and potential stock appreciation) of 8%–11% for the fiscal year, powered by its operational growth and capital return “flywheel.”
Delivering a Q2 report with steady comp sales, stable or slightly improved margins, and potentially raised guidance could be key to pushing total shareholder returns closer to the upper end of that 8%–11% range.
Kroger’s Valuation Reflects Growth and Competitive Pressures
Based on trailing twelve months, Kroger is trading at 18.4x earnings—slightly above the sector average of 14.7x, but still the lowest among its major peers. Costco (COST) trades at 53.5x, Walmart at 36.6x, and Dollar General at 20x.
This discount isn’t due to poor operations, but reflects a combination of slower growth, lower margins, and competitive pressure. Kroger’s grocery-centric model naturally has lower margins than some peers—Dollar General, for example, sells low-ticket items at higher margins—and its EPS growth is slower, with comp sales mostly organic and lacking the same scale expansion tailwinds enjoyed by Costco and Walmart.
Kroger also faces intense competition on price and convenience from Walmart, as well as on premium and delivery from Amazon/Whole Foods (AMZN), along with various regional chains, leaving it more exposed to share-loss risk. Projections for the next three to five years imply an EPS CAGR of 6.3%, with revenues growing largely in line with current inflation (2–3%).
Given this growth outlook and competitive environment, Kroger’s trailing twelve-month P/E is in line with its five-year average, which suggests limited upside from here. I wouldn’t expect Kroger to trade above 18x anytime soon, although the defensive thesis remains interesting: with a roughly 9% total shareholder return this year, Kroger still offers a compelling alternative to risk-free bonds, supporting its defensive appeal.
Is Kroger a Good Stock to Buy?
The Wall Street consensus for Kroger shares points to an average target price of $76.69, suggesting an upside potential of 12% over the next 12 months. Regardless of that potential gain, analysts remain somewhat divided, with eight out of 17 currently bullish and the remaining nine leaning toward neutral.
Defensive Strength or Limited Upside
Broader market trends, combined with Kroger’s consistent operational execution, suggest that the grocery-retail chain is likely to post numbers in line with or slightly above market expectations in Q2. However, as U.S. markets move toward a scenario where rate cuts appear increasingly likely, I expect investors to show less preference for defensive names like Kroger, especially with the stock trading near its historical multiples.
That said, I don’t see strong reasons to believe Kroger can consistently outperform the broader market over the next six to twelve months, even though the defensive thesis remains appealing in terms of shareholder returns versus risk-free bonds. For now, I would maintain a Hold rating on Kroger.