Kroger (KR)

Total return at 5 years: 17.3%/year = 14.8% appreciation + 2.5% dividend. The target price ($121) is ex-dividend; the $10 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $146 · Multiples $106) exceeds the market price ($61).

Today — with margin of safety: at $61 trades ~42.5% below its value discounted to today (~$106) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($121) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($61) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-13.5%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.5 bn of owner earnings in year 5 (vs ~$4.1 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo normalizado (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

An enterprise-level model (EV/EBIT on operating income, with cash and debt in the bridge): earnings are normalized by excluding the US$2,500 million impairment charge on the fulfillment network and other non-recurring charges of the last fiscal year (net of tax, ~US$2,200 million), consistent with the adjusted earnings per share the company itself guides for the current year (US$5.10-US$5.30). Year 1 (the window starting after August 15, 2026) grows 0.4%: identical-sales-excluding-fuel guidance was cut in September 2026 from 1.0%-2.0% to 0.2%-0.8% (with an approximately 140 basis point headwind from the Inflation Reduction Act) and the 0.4% comes from the midpoint (0.5%) less the 0.1 point gap between second-quarter sales excluding fuel, Vitacost and fulfillment centers (+0.1%) and identical sales (+0.2%); fuel is held at the recent level, without extrapolating its price effect. Year 0 grows 1.6% against the prior year because the fuel price inflated total sales (the second quarter rose 2.0% in total against 0.1% excluding fuel), and that difference is not extrapolated. With a low year 1 the path is a trough and recovery: 1.4%, 2.1%, 2.5% and 2.9% in years 2 to 5, with the arrival rate intact. The year-0 operating margin (3.29%) is the trailing adjusted FIFO operating profit (US$4,915 million: US$4,905 million of fiscal 2025 plus US$2,620 million less US$2,610 million of the first two comparable quarters, Table 7 of the release), not overwritten with the 1.4% GAAP result, which carries the US$2,500 million impairment of the third quarter of fiscal 2025 and the transformation and canceled-merger charges; year 1 (3.40%) follows the reaffirmed guidance of US$5,000-5,200 million: the second half of fiscal 2026 implied at the midpoint (US$2,480 million) plus a first half of 2027 equal to that of 2026 (US$2,620 million). The net margin improves gradually on the greater weight of Kroger Precision Marketing (retail media, high margin) and private label, without assuming an abrupt jump. Cash does not accumulate (accumulateCash: false): Kroger actively repurchases its shares (US$3,767 million over the trailing twelve months, ~10% of market capitalization), so the surplus is modeled via a declining share path (sharesPath) rather than accumulated cash, the same one for all three scenarios (§6). The rate of that path —2.6% a year— comes in below the 8.6% revealed by the shares outstanding series of the last twelve months, and the difference is declared: the buyback peak of the last two fiscal years (US$4,160 million in the one ended February 2025 and US$2,700 million in the one ended January 2026) leaned on the US$10,500 million of debt issued in the first of them, and §6 does not extrapolate a leveraged buyback. What the flow sustains on its own, after the dividend, is 3.8% of market capitalization; the path stays below that level too, consistent with the store and distribution network capex the company itself guides and with a thin-margin business where buybacks are cut before investment. Trailing-twelve-month buybacks were US$3,767 million (US$1,271 million in the first half of fiscal 2026) and about US$800 million remain of the current authorization, which the company expects to complete before the end of fiscal 2026. On September 28, 2026 the company issued US$1,500 million of senior notes (US$650 million at 5.800% due 2032 and US$850 million at 6.200% due 2036) to refinance debt maturing in October 2026 and for general corporate purposes; the bridge keeps the debt of the August 15, 2026 balance sheet (US$1,452 million of current portion), because the issuance refinances and does not materially change net debt. Year 0 is the TTM to August 15, 2026 (second quarter of fiscal 2026, 10-Q filed September 18, 2026). Maintenance capex is set close to depreciation (maintPct 0.85), consistent with a low revenue growth business where most investment is replacement, not expansion (Greenwald, §3).

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $121 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $61, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $121 in 5 years plus $10 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $106. Against the current market price ($61), the margin of safety is 42.5% (trades below the maximum → there is margin) and the total return at that price would be 17.3% annually.

• Multiple vs. sector band. Trades at 10× normalized operating income, below the 12×-17× specialty-retail range, with the base-case exit multiple (13.2×) in the lower part of that band.
• Multiple against the band. Trades at 10× normalized operating income, below the floor of the specialty-retail band (12×).
• Dividend yield. The current dividend represents a real and growing contribution to total return, with a recent high-single-digit growth rate.
• Buybacks at a low price. The current buyback pace, sustained at a depressed multiple, improves per-share value faster than a full-price buyback scenario would.
• Implied earnings yield. The inverse of the current entry multiple comfortably exceeds the 10% bar, consistent with a low-growth business trading cheaply.
• Sensitivity to terminal multiple. The five-year value depends materially on the market re-rating the multiple toward the specialty-retail band; if it does not, the return remains much more moderate.
• Comparison with peers. Trades at a notable discount to other broad-assortment retailers in the library, without a structural reason (there is no sustained volume decline) that fully justifies it.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (91%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Operating cash flow of $7,300 million in the last fiscal year, solid and consistent year over year despite volatility in reported earnings.
• Return on capital. Modest against the 10% bar, typical of a capital-intensive, thin-margin business; calculated on the actual invested capital from the balance sheet.
• Reinvestment runway. Limited in the core business (more stores does not generate high returns); the higher-return runway is in scaling Kroger Precision Marketing and e-commerce.
• Earnings quality. The GAAP result for the last fiscal year is distorted by a non-cash impairment charge of $2,500 million; adjusted operating income grew 4.9%.
• Cash conversion. Operating cash flow comfortably exceeds reported net income, partly from adding back the non-cash impairment in the last fiscal year.
• Margin consistency. The FIFO gross margin and operating margin move within a very narrow range year over year, a sign of a predictable though low-return business.
• Accrual dependence. The LIFO charge ($157 million in the last fiscal year, versus $95 million the year before) is a minor accounting distortion normalized in adjusted earnings.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Kroger reports a single segment (retail operations), so the drivers above are business lines within that segment, not separate segments. Total growth combines grocery volume and price (identical sales), the drag from fuel prices, and the growing contribution of two higher-margin businesses that are still small in absolute terms: e-commerce and alternative profit streams led by Kroger Precision Marketing.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (15-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Identical sales. Accelerated from 1.5% to 2.9% in the last fiscal year; fiscal 2026 guidance was cut to 0.2%-0.8% and the second quarter printed 0.2%.
• E-commerce. Grew 17% adjusted in the last fiscal year, still a smaller share of total sales but with a clear expansion trajectory.
• Kroger Precision Marketing. Profit of the business grew 24% year over year in the second quarter of fiscal 2026 — the most dynamic margin engine of the business.
• Fuel. Sales fell 9.3% on lower prices, dragging down total reported growth without reflecting weakness in the core business.
• Store expansion. Growth is predominantly same-store sales; there is no aggressive network expansion sustaining growth on its own.
• Private label. More than $39,000 million in sales in 2025, a mix-margin driver more than an additional-volume driver.
• Macro sensitivity. Organic growth is low single digit, typical of a mature, defensive sector, without leverage to a strong economic cycle.

• Consumption recurrence. Food is non-discretionary, recurring spend by nature, which gives demand predictability even in a recession.
• Differentiated product vs. commodity. The grocery basket is largely a homogeneous product across chains; the real differentiation is in price, location and private label, not in the product itself.
• Pricing power. Limited: the company actively invests in price to defend volume against Walmart and Aldi, and the adjusted FIFO margin moved only 44 basis points in the last fiscal year.
• Operating leverage. Modest: adjusted operating income grew 4.9% on nearly flat revenue (+0.4%), showing some scale but not a strong leverage effect.
• Recession behavior. Grocery spending is defensive; the retail media business and private label are additional drivers of margin resilience.
• Sector capital cycle. The grocery sector has structurally low, highly competed returns, with constant entry from deep discounters (Aldi) and buying clubs (Costco).
• Revenue diversification. A single reported segment, but with alternative profit streams (media, data, pharmacy) that already contribute a growing, higher-margin share.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• !Interest coverage (EBIT / interest)7.1x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 91% of ROIC
• ✓Value creation (ROIC − 10% bar)+10pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.3x
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.1% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt of approximately $15,400 million against equity of $6,500 million; material but actively managed to preserve investment-grade status.
• Liquidity. Cash of approximately $2,900 million plus robust, recurring operating cash flow, sufficient to cover debt service and guided capex.
• Pension obligations. Kroger contributes to several multiemployer pension plans whose estimated accumulated liability would exceed the value of trust assets, according to the company's own belief.
• Credit rating. The company states as an explicit priority maintaining its investment-grade rating.
• Working capital structure. High-inventory-turnover business with suppliers as a partial funding source, typical of grocery retail.
• Litigation exposure. Opioid litigation and litigation stemming from the failed Albertsons merger, with loss exposure whose prediction involves material uncertainty.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Leadership alignment. Recently onboarded CEO (February 2026), without a long prior track record inside the company; execution still to be proven.
• Capital allocation. Prioritizes buybacks and a growing dividend over aggressive expansion; disciplined capex, close to depreciation.
• Buyback track record. Repurchased approximately $2,700 million in the last fiscal year at a depressed entry multiple, which is accretive to per-share value.
• Credit rating. Management explicitly states the priority of maintaining its investment-grade rating, disciplining leverage.
• Transparency about mistakes. The company candidly acknowledged that the automated fulfillment network did not meet expectations, rather than downplaying the impairment charge.

• Motivated seller: a $2,500 million impairment charge on the automated fulfillment network sank GAAP operating income 51% year over year, even though adjusted operating income grew 4.9%.
• Motivated seller: leadership transition, with a new CEO onboarded in February 2026 after a year of interim leadership and the failed Albertsons merger.
• Missing buyers: trades at 10× normalized operating income, below the floor of the specialty-retail band (12×), with GAAP earnings depressed by a non-cash impairment.

None of the three sources point to the business breaking down: identical sales excluding fuel accelerated to 2.9% in the last fiscal year and adjusted e-commerce grew 17%. The discount looks more like a reaction to a one-time accounting charge and management uncertainty than a deterioration of the underlying business, though the disruption risk from agentic AI shopping deserves monitoring before considering the thesis settled.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +11%/year (+65% total): the margin of safety protects the downside. The bull (+25%/year, +202% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Disruption from agentic AI shopping. AI agents shopping on the consumer's behalf could disintermediate Kroger from the direct customer relationship, weakening the data asset.
• Labor relations. Approximately 350 collective bargaining agreements in force; contract expirations can lead to strikes affecting a substantial number of stores.
• Multiemployer pensions. Estimated liability that, according to the company's own belief, exceeds the value of trust assets, with contributions expected to grow.
• Cybersecurity. Growing dependence on complex information technology systems, with AI adoption widening the risk surface.
• Significant litigation. Opioid litigation and litigation stemming from the failed Albertsons merger, with uncertain outcomes.
• Structural competition. Constant pressure from Walmart, Aldi, Costco and digital commerce on an already thin margin, without strong pricing power.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 20% above the 10% bar, with a +43% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 2.0 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 13% (EBIT/EV) + ROIC 20% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -13% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +8%/yr, bull-scenario ceiling +23%/yr over 5y and a +43% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: cost advantage, efficient scale, intangibles, switching costs → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -13%, within what we project (5%) — the story squares with the numbers.