Kroger Co.: Building a Bigger Nest

Research evidence excerpt

Kroger Co.: Building a Bigger Nest

espectively. The deal provides an immediate increase in scale and framework

** = Based on consensus methodology

further strengthens KR's position across several Midwestern markets. e = Morgan Stanley Research estimates

Quarterly EPS ($)

3. Scale is more valuable today than ever. Competitive intensity in Food Retail is 2026e 2026e 2027e 2027e

Quarter 2025 Prior Current Prior Current

rising (see here). WMT continues to invest in price, AMZN (covered by Brian Nowak) Q1 1.49 - 1.58a - -

is expanding rapid grocery delivery, and leadership changes across the industry is Q2 1.04 - 1.04 - -

Q3 1.05 - 1.16 - -

leading to more aggressive competitive strategies. Against this backdrop, larger Q4 1.28 - 1.40 - -

scale can provide incremental procurement, supply chain, technology, and e = Morgan Stanley Research estimates, a = Actual Company reported data

advertising advantages. In our view, the acquisition highlights that increased scale

will be critically important to compete in the years ahead.

4. Our accretion model suggests KR is acquiring Giant Eagle at ~5.5x EV/EBITDA.

Per an 8-K filing, KR is acquiring the Giant Eagle stores for $1.65bn. Per the press

release, KR expects the deal to be accretive to adj. EPS in the second full year after

the acquisition closes (KR expects the deal to close in 2027). Based on this, we

estimate Giant Eagle generates ~$100mn in EBIT. This assumes '27 EPS dilution of

~0.5% and that KR is foregoing earning ~5.5% interest on the $1.25bn in cash being

used for the acquisition. Given Giant Eagle revenue of ~$9bn, this results in a ~1.1%

EBIT margin for the business, which seems possible for a regional food retailer.

Coupled with a ~2.3% D&A rate (we assume in-line with KR), this suggests Giant