The market is about right about a gradual recovery. Cost savings and digital growth should lift earnings, but competition and acquisition spending limit the payoff from buybacks. My twelve-month target is $66.00.
Key points
- $5.50 a share is my fiscal 2027 adjusted earnings forecast, excluding Giant Eagle.
- 4% lower adjusted earnings in the second quarter show why rising earnings per share need scrutiny.
- $66.00 a share is my twelve-month target, supporting Hold rather than Buy.
The call
The market expects little immediate improvement. At my assumed valuation of 12 times earnings, today's price requires $5.25 a share, barely above this year's guidance midpoint. It does not require management's ambitious long-term growth plan to succeed. The question is whether lower grocery prices bring back enough purchases to grow profit.
Per-share growth is outrunning grocery profitKroger Q2 FY2026 year-over-year change (%); September 11 release and September 18 10-Q.
I expect a gradual recovery, not a breakthrough. My fiscal 2027 forecast assumes a 3.5% operating margin before inventory-cost adjustments. Sourcing savings and profitable digital growth should help, but Walmart is also cutting prices. Kroger's recent stock rebound is encouraging; its longer-term underperformance argues against paying a turnaround premium yet.
Valuation
| Driver | My estimate |
|---|
| Fiscal 2027 adjusted operating profit before inventory adjustment | $5.30 billion |
| Fiscal 2027 inventory, interest and pension deductions | $1.10 billion |
| Fiscal 2027 adjusted net earnings | $3.23 billion |
| Fiscal 2027 adjusted earnings per diluted share | $5.50 |
| Twelve-month earnings multiple | 12 times |
| Twelve-month price target | $66.00 |
The model uses a 23% tax rate and 588 million diluted shares. Twelve times recognizes dependable grocery demand without assigning separate value to the turnaround story. A weaker outcome supports roughly $51 a share versus roughly $80 in a stronger recovery, leaving insufficient upside in my central forecast for a Buy.
Risks
- Competitors could absorb Kroger's price cuts without surrendering customers; watch grocery units and basket sizes.
- Cash could constrain repurchases: first-half operating cash after capital spending fell sharply; watch inventory and acquisition funding.
- Albertsons litigation could consume cash or increase borrowing; watch court findings rather than treating claimed damages as an established liability.
What would change my mind
Sustained grocery-unit growth alongside rising adjusted operating profit by the first half of fiscal 2027 would justify a higher earnings forecast and valuation.
