KROGER CO (KR) stock intrinsic value fair value estimate & owner earnings analysis

Kroger is the largest traditional supermarket operator in the United States, with more than 2,400 supermarkets under banners such as Kroger, Ralphs, King Soopers, Fred Meyer, Harris Teeter, Fry's, Smith's and Mariano's, along with fuel centers, pharmacies, its Our Brands private-label line and a growing data and retail-media business. Sales were $147.6 billion in fiscal 2025, the year ended January 31, 2026. Grocery margins are thin, so the value of the company depends on running the stores efficiently and keeping capital spending disciplined. How we measured earnings. We start from operating cash flow and remove short-term working-capital swings, stock-based pay, the part of capital spending needed just to keep the stores current, and the LIFO inventory charge. We count that charge as a real cost because it is the price of carrying inventory through food inflation, and it lowered fiscal 2022 owner earnings by about $0.86 per share. Lease payments and pension contributions are also kept as costs. Non-cash write-downs are added back. That includes the $2.5 billion fiscal 2025 write-down of the automated, Ocado-based warehouse network: Kroger is closing facilities in Pleasant Prairie, Wisconsin; Frederick, Maryland; and Groveland, Florida, and it cancelled a planned Charlotte site. That money is already spent, but we treat it as evidence of costly capital decisions in the bear case. On this basis owner earnings per share were $3.87 in fiscal 2021, $4.72 in 2022, $1.57 in 2023, $2.65 in 2024 and $4.51 in 2025. One-off items held down 2023 and 2024: a $1.5 billion opioid settlement charge and $316 million of Albertsons merger costs in 2023, and $684 million of merger costs in 2024. Before paying its lenders, the business produced a median of about $3.5 billion a year over fiscal 2021 to 2025. We use that five-year window because cash generation stepped up after 2020 and stayed there through the inflation surge and its unwinding. In 2016 to 2019 the business produced only about $1.1 to $1.5 billion a year; that earlier, lower-margin period anchors the bear case instead. Cash flow before interest rose 66% in fiscal 2025, or 26% if the 2024 merger costs are added back. Even so, the base case starts at about $3.5 billion, slightly below fiscal 2025. Capital spending in the first half of fiscal 2026 was $2.4 billion, against $2.0 billion a year earlier, as Kroger speeds up new-store building, and we give no credit for that growth until it produces sales. Base case, about $81 per share: cash flow before interest of about $3.5 billion, growing 1.5% a year for ten years as Kroger keeps passing food inflation through to its prices, as it has for decades. After that it holds flat, with no further growth assumed. We assume the earning power lasts because the store network, purchasing scale and customer data have kept Kroger a leading grocer for more than a century. The business is worth about $64.6 billion and owes about $15.5 billion, leaving about $49.1 billion for shareholders. Bear case, about $35 per share: price competition from Walmart, Costco, Aldi and Amazon cuts cash flow before interest to about $2.6 billion within three years, a little less than halfway back to the 2016 to 2019 level. After year ten it declines 2% a year. Kroger also loses the Albertsons lawsuit and pays the $600 million termination fee Albertsons is claiming, plus damages, about $1 billion in total. The business is worth about $37.8 billion and owes about $16.2 billion, leaving about $21.5 billion for shareholders. Even in this case, cash flow covers interest about three times. Bull case, about $97 per share: cash flow starts near $3.75 billion, between the fiscal 2025 and fiscal 2022 levels, helped by closing the loss-making automated warehouses. It grows 2.5% a year for ten years, in line with Kroger's long-run sales growth, and then holds flat. The Albertsons claim fails. The business is worth about $74.1 billion and owes about $15.2 billion, leaving about $58.9 billion for shareholders. Debt. At August 15, 2026, Kroger had $15.4 billion of notes and other borrowings, about $1.7 billion of finance leases and $1.7 billion of cash. The notes carry coupons from 1.7% to 8.0% and mature as late as 2064. Most carry fixed rates below 6%. At January 31, 2026 their market value was $15.0 billion against $15.9 billion on the books, so we count the borrowings at about $1.4 billion below book value. We also include about $0.85 billion for the remaining opioid settlement installments: roughly $1.24 billion payable over 11 years and $177 million over 6 years, with payments that began in 2024. After keeping about $0.4 billion of cash to run the stores, net debt is roughly $15.2 billion, or about $25 per share. That is why the shares are worth much less than the business. Debt rose by about $5.7 billion in fiscal 2024: Kroger issued $10.5 billion of notes to pay for Albertsons, redeemed $4.7 billion after the merger was blocked, and used much of the rest for a $5 billion accelerated share buyback. Per-share figures use about 608 million diluted shares. What changed. Our previous base case was about $41 per share. Most of the increase comes from how we now value the business. We value its cash flow before interest at a fixed 6% rate and then subtract what it owes, instead of discounting at higher rates that already built in the market's view of risk. We also anchor on five years of cash generation instead of three, at today's lower share count. On growth we are more cautious than before, at 1.5% a year in the base case against 4.5% previously, and we now count the Albertsons lawsuit and the opioid payments as liabilities. What could make this wrong: a deeper or longer price war than we assume, more costly write-offs like the automated warehouse network, an Albertsons judgment larger than we assume, or new-store spending that keeps capital costs high without lifting sales.