Kroger (NASDAQ: KR) shares fell following the Q1 report, but this is an opportunity for investors. The company is performing well in the current environment and maintained guidance but gave no indication on the progress of its merger with Albertson’s (NYSE: ACI). The merger faces vehement opposition from multiple sources and may be in jeopardy. The takeaway for investors is that the ACI deal is a win-win regardless of the outcome.

If the merger continues, KR will acquire new assets and revenue and increase its profit and capital return potential. If the deal doesn’t go through, Kroger will be in the best financial position it's been in for years while still dominating the grocery industry. In that scenario, the company will begin repurchasing shares again, and it may accelerate its dividend growth agenda. 

Kroger Improves Its Financial Position: Capital Returns Will Follow

Kroger paused its share-repurchase activity when the Albertson’s deal materialized. The move is intended to shore up the already solid financial position, and it is working. The company announced a reduction in debt and increased capital for FQ1, with its net debt to EBITDA ratio at the lowest in history.

The 1.34X reported is a full handle below the company’s target of 2.3 to 2.5X EBITDA, which is still very low and sustainable. In this light, if the deal for Albertson’s falls through, Kroger could resume repurchases, increase its dividend, and maintain a better-than-targeted leverage ratio. Nothing wrong with that outlook. 

The analysts haven’t had anything to say following the release, which speaks volumes to the market. The 17 analysts with current ratings have the consensus pegged at Hold and see the stock price moving at least 15% higher. The price target has held steady over the past year, and the low target of $42 marks the bottom of the current range, so it supports the market, as does the institutional activity.

The institutions own about 78% of the stock, have been buying on balance for 4 consecutive quarters, and the buying has ramped higher sequentially in all 4 quarters. 

Kroger Has Stable Quarter; Growth Efforts Are Working 

Kroger didn’t have a smash quarter but produced growth and better-than-expected results on the bottom line. The company reported $45.16 billion in revenue for a gain of 1.3% across the network. Comp sales are up 3.5% ex-fuel and are supported by the growth of digital. Digital sales grew by 15% and are aided by a deal with Uber to deliver floral and deli items.

More importantly, the company’s margin widened and left earnings above the consensus despite top-line weakness relative to the analyst's estimates. On the bottom line, the adjusted $1.51 is up 3.9% compared to the 1.3% top-line growth and beat the Marketbeat.com consensus by 3.9%.

The guidance is solid if not favorable to higher prices. The company reiterated its outlook for sales growth at 1% to 2% comp and the guidance for adjusted EPS but raised it target for FCF. Free Cash Flow is expected to be $2.5 billion to $2.7 billion compared to the prior high target of $2.5. Whether the cash is used to buy Albertson’s or to pay investors for their confidence, it is great news for the company. 

The Technical Outlook: Kroger Uptrend Tries To Resume

Kroger shares hit a significant turning point last quarter but have struggled to gain traction since. The market came in contact with a significant uptrend line that crosses a significant support line and produced a trend-following signal. The market is still testing support; the good news is that support is still strong.

Support also is moving higher, now at the $43.50 level, a bullish signal. Assuming no change to the outlook, the stock may continue to trend sideways until the ACI deal is approved. Either way, the news should open the door to another sustained rally.