Kroger’s stock looks inflated

The effect of inflation is clearly visible on the buying behavior of customers. Customers at Kroger are paying more per shopping trip, but putting fewer units in their baskets, Kroger said on an earnings call Thursday. Customers are saving in various ways, such as buying larger packs of certain items. Same-store sales of Kroger’s private-label brands rose 6.3% in the latest quarter, a healthy pace compared to national brands.

Some such money-pinching behavior isn’t such a bad thing for Kroger, for which private-label products comprise a fifth of sales excluding fuel. Gross margin on its own brands is about 600 basis points higher than national brands. But this was not enough to offset higher supply-chain costs and so-called value investing, or discounting.

The company’s gross margin declined 1 percentage point to 21.6% in the latest quarter. Kroger did manage to take control of operating costs, which were down about 6% from a year ago. The company said it has discovered new ways to cut costs, including a new bakery forecasting tool that helped reduce waste.

Kroger said it expects same-store sales to grow 2.5% to 3.5% in the current fiscal year ending in early 2023, up from the 2%-3% range it telegraphed three months ago. This has also raised the expectation of profit. Despite the rosier outlook, Kroger stock fell slightly after the earnings call.

There are two things that can put investors on edge. First, there’s concern that Kroger may have lost some grocery market share. Its same-store sales rose 4.1%, according to Census Bureau data, which is on the back of the 8.9% growth the supermarket saw in a nearly three-month period. There is a risk that margins will be under even greater pressure in future quarters if Kroger has to offer more discounts on products to attract customers.

Second, Kroger stock has outperformed the market this year — up 12% compared to the S&P 500’s 23% decline — as investors look to areas that could face inflation and an economic downturn. Its shares have fallen after Russia’s invasion of Ukraine and after the market crashed. higher inflation data than expected, As a result, its share price, as a multiplier of forward-12-month expected sales, is 14% higher than its 10-year average, and is in line with peak valuation levels during previous episodes of market stress in 2007 and 2015. has come close.

Even when consumers keep loading groceries, investors may be more cautious about loading up groceries at these prices.

write to jinju lee jinjoo.lee@wsj.com