KR

We rate KROGER CO (KR) as a Reduce with a composite score of 45.8/100 at a current price of $69.34. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (91th percentile) and momentum (52th percentile), which together account for the majority of the composite score. Offsetting weakness in value (27th percentile) and investment (31th percentile) tempers our overall conviction. We assign a No Moat rating (28/100), Medium uncertainty, and Poor capital allocation.

Key items to watch: balance sheet deleveraging progress; valuation compression risk if growth disappoints. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

KROGER CO holds a top-quartile position (#0 of 50) within the Retail Trade sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 45.8/100 places it at rank #2672 in our full 7,333-stock universe. With a $42.8B market capitalization, KROGER CO operates at meaningful scale within the Retail Trade sector, providing competitive advantages in distribution, procurement, and customer reach.

Revenue contraction of -0% combined with momentum at the 52th percentile paints a cautious picture of the near-term business outlook. The market appears to be pricing in continued challenges, and a catalyst for reversal is not clearly visible from current data.

The margin cascade tells an important story: gross margins of 23% (-12.8pp vs sector) narrow to operating margins of 1% (-3.1pp vs sector) and net margins of 0.4%, yielding a gross-to-net conversion rate of 2%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $69.34, KROGER CO is trading at a premium to fundamental value. Our value factor score of 27/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. The premium valuation implies the market is pricing in significant future growth or quality improvements that are not yet fully reflected in current fundamentals.

The stock currently trades at a P/E of 53.8x (a 151% premium to the sector median of 21.4x), EV/EBITDA of 39.4x (at a premium), P/B of 6.0x, P/S of 0.3x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis finds only partially justified by current fundamentals.

We assign a Medium uncertainty rating to KROGER CO. The stock presents a balanced risk profile: significant leverage (227% debt-to-equity) and low beta of -0.24 — while defensive, this may indicate limited upside participation in bull markets. While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: significant leverage (227% debt-to-equity); low beta of -0.24 — while defensive, this may indicate limited upside participation in bull markets; elevated valuation multiple (P/E 53.8x) that leaves limited margin for error; the combination of leverage (227% D/E) and thin margins (0.4% net) amplifies downside risk. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 91th percentile and quality factor at the 36th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: above-average stability (91th percentile) suggests predictable business dynamics; a 2.03% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile is favorable for long-term investors.

We rate KROGER CO's capital allocation as Poor. Key concerns include elevated leverage (227% D/E), weak asset returns (ROA 1.5%). Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — KROGER CO significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, KROGER CO receives a Reduce rating with a composite score of 45.8/100 (rank #2672 of 7,333). Our quantitative framework assigns a No Moat (28/100, trend: stable), Medium uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 47/100.

Our analysis does not support a constructive view on KROGER CO at this time. The combination of limited competitive advantages, medium uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.