Grocery stores and retail food buying may not be the sexiest themes for investors. That said, they are supposed to be safe and defensive because consumers must eat and drink. The Kroger Company (NYSE: KR) is the largest pure-play grocery store chain in America with over a $37 billion market cap. Kroger wants to become even larger by acquiring Albertsons Companies Inc. (NYSE: ACI). The $11+ billion market cap has now been on the books nearly two years and would make Kroger even larger. Now Kroger is finding itself in a strategic bull position — but what is odd is that it’s because the merger might be blocked!
BMO Capital Markets analyst Kelly Bania raised Kroger’s rating to Outperform from Market Perform and its price target was raised to $60 from $58 in this BMO call. While this is an aggressive call considering that it is a grocery store chain, Wells Fargo issued an even more aggressive call back in April (see below).
Kroger had previously closed up 1.3% at $51.05 on Monday, and the shares were indicated up 1.8% at $52.00 on Tuesday. If this call proves to be correct, that leaves nearly 20% upside when the 2.2% dividend yield is included.
IS A BLOCKAGE GOOD?
Most investors do not want to see their acquisitions blocked. BMO’s view is that Kroger appears to be sitting pretty whether regulators block the Albertsons acquisition or not. It is the attractiveness of the stock with or without the merger that makes this call a Strategic Bull scenario — win on the merger you win, lose on the merger you win!
DEAL ALREADY UNDER PRESSURE
The U.S. government is already trying to block this merger. It was in February (2024) that the Federal Trade Commission sued to block this $25 billion Kroger acquisition of Albertsons. The FTC alleged that merging the two largest independent supermarkets would lead to higher grocery prices, followed by retail store closures and job losses.
KROGER IS ALREADY HUGE
Merging Kroger and Albertsons would merge dozens of chains around the nation (two-dozen or so from Kroger already). Here are some Kroger stats as of the most recent data without any addition of Albertsons:
- Kroger covers 35 states (plus D.C.) with 430,000 associates
- Kroger’s list of acquisitions includes Dillon Companies, Fred Meyer, Harris Teeter, Vitacost, Home Chef and Roundy’s
- Kroger’s total chain counts include 2,719 supermarkets, 2,252 pharmacies and 1,637 fuel centers
SLASH & BURN!
Kroger has already announced its updated and expanded divestiture plan in April with Albertsons and C&S Wholesale Grocers to try to appease regulators. The number of stores noted within the divestiture plan by geography was listed as follows by state:
- WA: 124 Albertsons Cos. and Kroger stores
- CA: 63 Albertsons Cos. stores
- CO: 91 Albertsons Cos. stores
- OR: 62 Albertsons Cos. and Kroger stores
- TX/LA: 30 Albertsons Cos. stores
- AZ: 101 Albertsons Cos. stores
- NV: 16 Albertsons Cos. stores
- IL: 35 Albertsons Cos. and Kroger stores
- AK: 18 Albertsons Cos. stores
- ID: 10 Albertsons Cos. stores
- NM: 9 Albertsons Cos. stores
- MT/UT/WY: 11 Albertsons Cos. stores
- DC/MD/VA/DE: 9 Harris Teeter stores
In short, that is 575 stores and locations that would not have to be divested between the two companies just to get the merger done.
BMO AS A Strategic BULL
So what does BMO actually see happening here? Bania now sees the odds of this merger being blocked at about 70%. BMO expects that a more likely no-deal scenario may actually be Kroger’s best path forward. And the benefit is that Kroger can achieve low double-digit percentage earnings growth in the first year even without the merger being consummated. Again, without about 575 stores having to be divested between the two companies. BMO sees the flip side also as a win. Even if the merger is allowed to close, Bania sees earnings growth in the mid-single digits in the first year as well.
STOCKS ALREADY LOOK WEAK
Why this would be good for the stocks is that Albertsons stock started 2024 at nearly $23.00 and shares were last seen down at $20.00. Kroger shares started 2024 at about $46.00 and rose to $58.00 by the start of April. Now the stock is back down to about $52.00 even after nearly a 2% rally based on this upgrade. Just keep in mind that this analyst call was targeting Kroger’s stock rather than Albertsons’ stock.
WHAT ABOUT WARREN BUFFETT & INSIDERS?
Does Warren Buffett even matter here to Oggonomics? Berkshire Hathaway, Inc. owns a 50 million share stake in Kroger. That’s about 6.9% of the shares outstanding, making Buffett the third largest Kroger shareholder behind Blackrock (7.9%) and Vanguard (11.2%).
BMO ISN’T ALONE (NOR THE MOST AGGRESSIVE!)
As noted earlier, BMO isn’t the only form who has changed to a positive rating on Kroger. Wells Fargo raised its prior Equal Weight rating up to Overweight and lifted its prior $58 target to $65 on the stock.
LOTS OF COMPETITION ALREADY! GOOD OR BAD?
Kroger does have at least some defense about how powerful its post-merger status would be when it comes to pricing power over the consumer. Many grocery store chains like Whole Foods and Trader Joe’s are also facing peers like Sprouts, Weis, Natural Grocers and Grocery Outlet. The biggest threat is of course Walmart Inc. (NYSE: WMT), and Walmart has been winning as cash-strapped shoppers are consolidating their trips to buy other goods with their groceries.
Destinations like Costco Wholesale Corp. (NASDAQ: COST) and Target Corp. (NYSE: TGT) are also adding competition every day. And much of rural America’s number-one (or only) alternative for groceries comes from the endless dollar stores like Dollar General Corp. (NYSE: DG), as well as from convenience stores and even gas stations.
Kroger has a 52-week range of $42.10 to $58.34 and its consensus analyst price target is $58.30.
