The Kroger Co.KRNYSE

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DCF Valuation

⚠️Model Warnings

•Terminal value represents 86% of enterprise value. Valuation highly sensitive to long-term assumptions.

DCF Valuation Summary

Strong Buy

Fair Value: $421.16 per share(market-calibrated)

+513.6%

Upside to Fair Value

Current

$68.64

Pure Model

$464.82

Fair Value

$421.16

Bull Case

$530.61

Bear Case

$383.54

Market Reality Check

Model Terminal Growth

2.50%

Market-Implied Growth

0.50%

Calibrated Growth

1.80%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $464.82.

What's Driving This Ratingfor KR

✓

CapEx already efficient

CapEx at 2.24% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

↑

Margin expansion modeled

Current EBIT margin is 2.39% — below the sector mature average of 16.00%. Model expands margins as the business scales and operating leverage kicks in. Year 10 EBIT reaches $20.1B (11.54% margin).

→

Moderate revenue growth

Analyst consensus projects 0.59% revenue growth, fading to 2.50% by Year 10. Revenue reaches $174.5B (vs $147.1B today).

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 200bps below the model's 2.50%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 65.69% indicates efficient cash generation. FCF reaches $16.0B by Year 10 (9.19% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.63

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)7.33%

Cost of Debt

Pre-tax Cost of Debt2.06%

Tax Rate20.05%

After-tax Cost of Debt1.65%

Equity Weight (E/V)66.18%

Debt Weight (D/V)33.82%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (66.18% × 7.33%) + (33.82% × 1.65%)

= 5.50%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$148.0B	$154.0B	$159.8B	$163.7B	$174.5B
EBIT	$3.5B	$3.7B	$3.8B	$11.9B	$20.1B
Tax	$708M	$737M	$765M	$2.4B	$4.0B
NOPAT	$2.8B	$2.9B	$3.1B	$9.5B	$16.1B
+ Depreciation	$3.6B	$3.8B	$3.9B	$4.0B	$4.3B
- Capex	$3.3B	$3.5B	$3.6B	$3.7B	$3.9B
- Δ NWC	$87M	$315M	$107M	$227M	$426M
Free Cash Flow	$3.0B	$2.9B	$3.3B	$9.6B	$16.0B
Discount Factor	0.948	0.852	0.765	0.687	0.585
Present Value	$2.9B	$2.5B	$2.5B	$6.6B	$9.4B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$16.0B

Terminal Growth Rate2.50%

WACC5.50%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$547.6B

PV of Terminal Value$320.6B

Exit Multiple Method

Year 10 EBITDA$24.4B

Exit Multiple (EV/EBITDA)20.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$487.9B

PV of Terminal Value$285.6B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$50.4B

PV of Terminal Value$320.6B

Enterprise Value$370.9B

(-) Net Debt$21.1B

Equity Value$349.8B

Shares Outstanding715M

Price per Share$489.24

Exit Multiple Method

PV of Projected FCFs$50.4B

PV of Terminal Value$285.6B

Enterprise Value$336.0B

(-) Net Debt$21.1B

Equity Value$314.9B

Shares Outstanding715M

Price per Share$440.40

Pure Model Fair Value

$464.82

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.50%	2.00%	2.50%	3.00%	3.50%
3.50%	$696.08	$664.94	$635.29	$607.06	$580.18
4.50%	$509.60	$559.87	$635.29	$607.06	$580.18
5.50%	$407.13	$431.85	$464.82	$510.96	$580.18
6.50%	$339.43	$353.56	$371.22	$393.93	$424.21
7.50%	$289.92	$298.78	$309.41	$322.40	$338.63

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$383.54

458.8% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 0.79

Base Case

$464.82

577.2% vs current

• Analyst consensus
• Terminal growth: 2.5%
• Beta: 0.63

Bull Case

$530.61

673.0% vs current

• +25% vs analyst consensus
• Terminal growth: 3.0%
• Beta: 0.53

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Consumer Defensive Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth0.59%

Year 3 Revenue Growth2.09%

Year 5 Revenue Growth0.67%

Year 7 Revenue Growth1.40%

Year 10 Revenue Growth2.50%

Terminal Growth Rate2.50%

Margin & Efficiency

Current EBIT Margin2.39%

Terminal EBIT Margin16.00%

Tax Rate20.05%

Historical Capex / Rev2.24%

NWC / Revenue10.00%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 20x EV/EBITDA (Consumer Defensive sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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