Shares of Kroger (NYSE:KR) really came to life again in the wake of the pandemic, and back in May of last year I concluded that Kroger was still a solid holding in my portfolio. This came after the company saw strong 2020 results for obvious reasons, and while there were some headwinds seen to the 2021 results, the outlook was still quite solid in my book. This left me to conclude that Kroger was, and still remains a good allocator and steward of capital, with valuations being compelling enough to hold a stake.
Ahead of the pandemic, Kroger posted 2019 sales at $122 billion, as operating margins were very thin, with operating profits of $2.3 billion translating into margins equal to just 1.8% of sales.
The company posted GAAP earnings of $1.7 billion, working down to GAAP earnings of $2.05 per share, with adjusted earnings coming in a few pennies higher than that. Shares traded at $30 ahead of the pandemic, translating into a mere 15 times earnings multiple as net debt of $14 billion was equal to about 2.5 times EBITDA of $5.6 billion.
Ahead of the pandemic the company guided for 2020 earnings between $2.30 and $2.40 per share and with shares trading at $28 just ahead of the start of Covid-19, valuations were non-demanding. Amidst all this I ended up buying a stake in the low thirties as the company was seeing a boom as a result of the pandemic. 2020 sales rose $10 billion to $132 billion, with adjusted earnings posted at $3.47 per share.
With the pandemic somewhat on its retreat, the company guided for 2021 identical sales to fall between 3 and 5%, with adjusted earnings per share seen at a midpoint of $2.85 per share. While this marks a big decline from the 2020 earnings, it still marks solid growth compared to the original 2020 outlook.
Net debt fell to $12 billion by the end of 2020, as based on the guidance, shares of Kroger traded at just 12-13 times earnings, while leverage ratios came down. This valuation was compelling enough despite the fact that there were no immediate triggers on the horizon, as the overall valuation looked compelling enough.
Forwarding since May of last year, shares have kept gaining ground as they rose to $45 by year-end 2021, only to rise to $62 in April of this year, before now falling back to $46 per share again. Following the run-up I took profits on approximately half my position at $50 during the run higher, a bit too early with the benefit of hindsight.
In March of this year, Kroger posted its 2021 results as identical sales ended up rising 0.2% (ex-fuel) which compares to an initial guidance calling for sales declines at around 4%. Adjusted earnings rose further to $3.68 per share, a dollar ahead of the original guidance, albeit that GAAP earnings came in at just $2.17 per share, with much of the discrepancy stemming from pension charges and losses on investments. Net debt was pretty stable at $11.7 billion and with EBITDA improving further to $7.2 billion, leverage ratios improved further to 1.6 times.
Even more, the company guided for 2-3% growth in identical sales and adjusted earnings coming in at a midpoint of $3.80 per share for the year 2022. The same low double-digit earnings multiple meant that shares rose to the $50 mark here. However, shares are down a quarter from the highs at $60 in recent months as that followed some momentum, with investors arguably fearful about inflation, impact on consumer spending and continued supply chain issues.
My mid-June, Kroger posted first quarter results with identical sales up 4.1%, as first quarter adjusted earnings are twenty-six cents ahead of last year at $1.45 per share. Net debt inched up to $12.5 billion, but leverage is flat following improved earnings power, as full year earnings are now seen ten cents ahead of the previous guidance at a midpoint of $3.90 per share.
Given this updated outlook shares trade at 11-12 times earnings again, as the performance is resilient, yet valuations are non-demanding as investors are pricing in tougher trends to come amidst inflation hurting margins and consumer spending consequently coming under pressure. The company remains very confident in its outlook as it hiked the dividend by 24% to $1.04 per share (per annum), yet a 2.3% dividend yield remains relatively modest (also given high interest rates) as the payout ratio remains quite low.
Truth is that shares have fallen back quite a bit even as 2020, 2021 and the first half of 2022 look to be quite solid, as the recent pullback in the shares has been quite severe. Nonetheless, I am not yet tempted to buy the dip given the state of financial markets as perhaps there are some risks to the full year outlook given the state of the economy.
Given all of this, I am waiting for the chance to scoop up some shares in the lower $40s, levels at which I am happy to initiate a full position again. For real valuation multiple inflation, some more integration of the regional chains might be needed. Kroger, nonetheless has done a solid job during the pandemic, which includes the online delivery capabilities following the Ocado partnership.
Therefore, I consider Kroger to be a steady play, benefiting from the fact that the company has been looking after its employees well, providing a real competitive advantage, although I do not expect great outsized returns in the near to medium term.