Telsey Advisory Group analyst Joseph Feldman reiterated an Outperform rating on Kroger Company (NYSE:KR) with a price target of $55.

Kroger is scheduled to report 2Q23 earnings on September 8.

The analyst notes that Kroger's growth and market share gains should be driven by expanding into new geographies (with and without stores).

The company is also expected to yield accretive returns on enhancing its product assortment (fresh and private brands), focusing on a seamless digital experience (supported by Ocado technology), and building loyalty, the analyst adds.

Feldman expects solid Q2 earnings, given continued strong at-home food consumption trends, inflation, and gains from strategic initiatives, including digital.

The analyst projects 2Q23 EPS of $0.92 vs. the FactSet (FS) consensus of $0.91.

According to the analyst, Kroger's acquisition of Albertsons Companies, Inc. (NYSE:ACI)(pending regulatory approvals) should further solidify its leadership in U.S. grocery. 

Feldman believes the combined company should be more productive and profitable, given the grander scale and complementary strengths.

Feldman forecasts ID sales, ex-fuel, of 1.5% vs. FS at 1.3%, supported by

continued healthy food-at-home consumption, inflation, and ongoing gains from the shift toward digital.

Recall, U.S. Census Bureau Food & Beverage Stores retail sales (not adjusted) were +1.5% in July, +1.4% in June, and +3.4% in May, and Food-At-Home CPI was up +3.6% in July, +4.7% in June, and +5.8% in May. Furthermore, recent earnings reports from other retailers indicated strong demand for grocery, which should bode well for Kroger, the analyst notes.

However, unlike peers, Kroger should not see the pressure related to the softer demand for discretionary products. The analyst anticipates an inline operating margin expansion of 8 bps to 2.9%. This reflects an expected gross margin improvement of 28 bps to 21.2%.

For FY23, the analyst maintains 2023 EPS of $4.57 vs. FS at $4.51. Feldman estimates an inline operating margin expansion of 16 bps to 3.2%.

Also Read: C&S, SoftBank Near Deal To Purchase Stores From Kroger, Albertsons: Report

Price Action: KR shares are trading higher by 0.92% to $45.43 on the last check Wednesday.