Kroger (KR, Financial) shares rise while Albertsons (ACI, Financial) faces slight selling pressure after court rulings temporarily blocked their $25 billion merger. Albertsons has decided to terminate the deal. The merger faced regulatory challenges, with the FTC suing to block it, citing antitrust concerns that could lead to higher prices and lower-quality products.
Judges in Oregon and Washington State agreed with the FTC, leading to the deal's temporary blockage. Albertsons responded by authorizing a $2 billion repurchase plan and increasing its quarterly dividend by 25%, resulting in an annual yield of 3.2%. The company also provided its FY24 financial outlook, projecting identical sales growth of 1.8-2.2% and adjusted EPS of $2.20-2.30.
As both companies move forward independently, several developments are noteworthy:
- Albertsons has filed a lawsuit against Kroger, alleging breach of the merger agreement and seeking billions in damages. Kroger's future earnings could be impacted if it is required to pay damages.
- Kroger's recent Q3 results showed positive comp growth driven by mainstream households and healthy private label demand. CEO Rodney McMullen stated that the business would continue without the merger and remains open to future deals.
- Albertsons, in its Q2 report, showed a 2.5% increase in comps and gains from productivity initiatives, though labor wages remain a concern for future margins.
The termination of the Kroger-Albertsons merger amidst regulatory challenges presents near-term difficulties for both companies, especially given the competitive grocery market. Mass merchants like Walmart (WMT, Financial) and Costco (COST, Financial) benefit from consumers seeking value amid inflation, with Walmart gaining market share in U.S. grocery. While comp growth may stay strong for Albertsons and Kroger, increased competition could pressure margins and lead to earnings volatility.
