Citi Initiates Downside Watch on Kroger as Walmart Escalates Price War

Citi has opened a short-term downside catalyst watch on Kroger (NYSE: KR) ahead of the grocer's second-quarter results, citing intensifying price competition from rival Walmart (NYSE: WMT). The bank's analysts warn that Walmart's aggressive pricing strategy could negatively impact Kroger's comparable sales and profit margins.

Walmart's Price Offensive

According to Citi, the increased competitive pressure stems from a roughly $3 billion tariff refund received by Walmart. The retail giant is reportedly investing a large portion of this sum into lowering food and grocery prices to capture additional market share.

To put the figure in perspective, Citi noted that the $3 billion investment is a significant amount when compared to Kroger's total annual EBIT of approximately $5 billion. "We believe this competitive dynamic seems more pronounced than when we last heard from mgmt in 1Q, and may not be as short-term as hoped," analyst Paul Lejuez wrote in the note.

Impact on Kroger's Outlook

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While Citi expects Kroger to report roughly in-line second-quarter results on Sept. 11, with identical sales growth of 1% and earnings of $1.05 per share, it anticipates a more cautious outlook from management for the remainder of the year. The bank forecasts that Kroger may cut its full-year comparable sales guidance and issue an earnings range of $5.00 to $5.20 per share.

Reflecting this more challenging environment, Citi has lowered its own full-year earnings estimate for Kroger to $5.05 from a previous $5.22, citing a more conservative view on gross margins. The bank also trimmed its 2027 forecast on the expectation that the competitive dynamics will persist.

Analyst Actions and Data

Supporting its thesis, Citi's proprietary traffic tracker showed that foot traffic at Kroger stores decelerated to 0.4% during the quarter, down from 1.7% previously. In response to the heightened risks, the bank has reduced its price target on Kroger stock to $57 from its prior target of $61.