CINCINNATI — With decision time possibly at hand for the pending Kroger-Albertsons merger, Rodney McMullen, chairman and chief executive officer of The Kroger Co., said the company has made a strong case for the $24.6 billion deal but stands ready to move forward if regulators block it.

A Federal Trade Commission hearing in Oregon, begun Aug. 26, that seeks a preliminary injunction against the transaction is expected to wrap up in the coming days. In late February, the FTC had issued an administrative complaint and filed a lawsuit — joined by eight states and the District of Columbia — to stop the merger.

“As the preliminary injunction trial with the FTC nears its conclusion, we are confident in the facts and the strengths of our position,” McMullen said in a Sept. 12 analyst call on Cincinnati-based Kroger’s fiscal 2024 second-quarter results.

Other litigation for the nearly two-year-old merger deal — in which Kroger plans to acquire Albertsons Cos. — also is pending. In mid-August, Kroger sued to toss the FTC’s administrative complaint, calling it unconstitutional. Among legal actions taken by states, Colorado sued in mid-February to halt the transaction, but then in July Kroger agreed to suspend the deal and hold a Sept. 30 trial on the merger’s merits. Earlier, in April, a judge in Washington set a Sept. 16 trial after allowing the state’s suit against the merger to proceed.

“As I have said before, we remain committed to closing the merger because it will provide meaningful and measurable benefits for customers, associates and communities across the country, and we look forward to bringing these commitments to life,” McMullen said in the call.

“Regardless of the outcome of the trials, Kroger is operating from a position of strength, and we are optimistic about our future,” he said. “Our business is more diverse than ever, and our value creation model provides us with multiple ways to drive sustainable growth. We are delivering strong free cash flow that allows us to invest in our business and drive attractive returns for our shareholders.”

What’s driving the merger

Kroger sees the combination with Albertsons — the largest-ever US conventional supermarket merger deal — as a way to build the scale to better compete with mass chains like Walmart, Costco, Target and Dollar General as well as discount grocers and online retailers like Aldi and Amazon, which have taken significant grocery retail market share from traditional supermarkets over the past few decades.

“The retail industry continues to be more competitive, and we know how our customers shop every day,” McMullen told analysts. “They are making decisions on where to eat and where to buy their groceries. They shop at a wide range of competitors, from Costco to Amazon to dollar stores, and they eat at restaurants. They shop digitally and brick and mortar.”

When unveiled in October 2022, Kroger and Boise, Idaho-based Albertsons said the merger would form a company with revenue of $210 billion and 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies, 2,015 fuel centers and 710,000 employees in 48 states and DC. A September 2023 divestiture deal with C&S Wholesale Grocers — aimed at addressing regulators’ antitrust concerns — was expanded this past April to a $2.9 billion package, including 579 stores in 18 states and DC; eight distribution centers and additional warehouse space; and five private labels, plus access to two other brands.

“It has been a long journey, and our associates have done an excellent job serving customers and running the day-to-day operations of our business, while also preparing for the merger integration,” McMullen said. “Work continues to progress, and our teams are laser-focused on ensuring a seamless transition for our customers and associates from day one. It is exciting to see the complementary strengths of both Kroger’s and Albertsons’ organizations, and we look forward to combining these strengths to provide customers an even better experience as part of our merger preparation.”

McMullen said that, during the second quarter, Kroger completed a $10.5 billion debt offering, the net proceeds of which are slated to partially fund the cash portion of the merger. Part of the offering’s proceeds, he noted, are subject to a special mandatory redemption if the merger isn’t finalized.

Earlier this month, the Cincinnati Enquirer reported that, during the FTC hearing in US District Court in Portland, Ore., a Kroger attorney said the merger wouldn’t occur if an injunction is granted. Such a decision would entail an even longer delay for Kroger and Albertsons for a transaction already about 23 months in the making.

Flattish Q2 performance

Meanwhile, Kroger saw adjusted earnings dip and sales inch up for its second quarter ended Aug. 17.

Second-quarter net income came in at $466 million, equal to 64¢ per share on the common stock, which compared with a loss of $180 million a year earlier. The prior-year loss mainly reflects a more than $1.1 billion charge from a settlement with states for claims that Kroger Co. pharmacies overprescribed opioid painkillers.

On an adjusted basis, net earnings in the 2024 quarter were $681 million, or 93¢ per share, versus $699 million, or 96¢ per share, a year ago. Analysts, on average, had projected adjusted earnings per share of 91¢ for the 2024 quarter.

At the top line, Kroger’s net sales were virtually flat, up 0.2% to $33.91 billion from $33.85 billion a year earlier. Excluding fuel, net sales rose 1.3%. Identical sales excluding gasoline rose 1.2% from a year ago. Digital sales grew 11%, with delivery sales rising 17%.

“Our long-term model demonstrates that by consistently keeping prices low, we increase customer loyalty and grow share of wallet,” McMullen said. “While the food-at-home industry remains competitive, our model drives efficiencies that allow us to sustainably invest in value and maintain competitive price spreads with key competitors. In addition to lowering prices, we executed our go-to-market strategy through our pillars of ‘Fresh, Our Brands, Personalization and Seamless.’”

During the second quarter, Kroger added 223 new own-brand products, including items for its value-focused Smart Way grocery line. The retailer has rolled out nearly 600 new private brand products this year, including the launch of the new Field & Vine fresh produce brand in late July. McMullen said over 90% of Kroger customer households bought Our Brands items in the quarter.

“Smart Way, one of our opening-price-point brands, is delivering exceptional value to customers on a budget,” he said. “These are ultra-low-priced essentials and pantry staples that we know our customers need the most. We continued to expand the SmartWay lineup in the second quarter to meet our customer needs for more value. We are also making progress on Our Brands’ refreshment rollout, with more of the portfolio to be refreshed later this year. We are excited to see our customers respond to these new designs. As we innovate within the portfolio and expand to meet customer needs, we are improving our mix and driving better profitability.”

Kroger upheld its full-year adjusted EPS guidance of $4.30 to $4.50 but raised the bottom end of its sales outlook. The company now projects identical sales growth excluding fuel of 0.75% to 1.75%, compared with 0.25% to 1.75% previously.