Kroger's Generative AI Push with Google Cloud: A Strategic but Non-Transformative Move Amid Overvaluation

What happened

Kroger announced an expanded partnership with Google Cloud to implement generative AI, aiming to enhance customer experience and drive digital growth. This aligns with Kroger's existing strategy to bolster data monetization and personalization, key to its alternative profit streams like retail media. However, DeepValue's analysis highlights Kroger's significant challenges, including an ~87% overvaluation per DCF, elevated leverage, and unresolved legal overhangs from opioids and the Albertsons merger. The AI initiative, while potentially improving long-term digital capabilities, does not address these fundamental risks or alter the competitive pressures from Walmart and Costco in a slow-growth industry. Investors should view this as a tactical step in Kroger's ongoing efforts, but it lacks the immediacy to shift the investment thesis away from current concerns.

Implication

This move could enhance Kroger's customer personalization and retail media revenue growth over time, aligning with its focus on high-margin alternative profits. However, in a highly competitive grocery sector, such investments are often necessary for parity rather than creating a durable moat. The implementation costs may strain margins or require additional capex, potentially worsening leverage already at 2.76x net debt/EBITDA. Given Kroger's current valuation at ~52x TTM EPS, any benefits from AI are likely priced in, offering limited upside. Therefore, while strategically sound, this news doesn't justify changing the cautious investment outlook highlighted in DeepValue's report.

Thesis delta

The investment thesis remains unchanged as Kroger's AI initiative is a continuation of its digital growth strategy and doesn't resolve the key issues of overvaluation, high leverage, or legal uncertainties. No shift from the 'WAIT' recommendation is warranted; investors should still await a lower entry price or clearer de-risking before considering a buy.