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Investing.com -- On Thursday, Moody's Ratings announced an update on Kroger Company's (NYSE:KR) financial outlook, shifting it to stable from the previously negative stance. Concurrently, the firm maintained Kroger's Baa1 rating for senior unsecured notes and upheld its Prime-2 rating for the supermarket giant's backed commercial paper program.

The revision to a stable outlook is attributed to the anticipation that Kroger's credit metrics will continue to improve over the next year, especially after the cancellation of its planned merger with Albertsons Companies (NYSE:ACI), Inc. Moody's acknowledges Kroger's robust free cash flow, which is expected to provide sufficient coverage for its opioid settlement payments and other ongoing litigation expenses. The outlook also takes into account Kroger's ability to sustain balanced financial policies and retain strong liquidity.

Kroger's affirmation at a Baa1 rating reflects its substantial scale and dominance as the leading traditional grocery store chain in the United States. The company's strategic focus on customer satisfaction and loyalty, coupled with its diverse store formats and comprehensive product offerings, positions Kroger advantageously against its competitors.

Despite challenges such as pricing pressures, high labor costs, and squeezed pharmacy margins, Moody's projects Kroger's operational performance to remain sturdy in a tough consumer spending climate. Financial estimates place Kroger's debt/EBITDA ratio at 3.3x and EBIT to interest coverage at 5.3x for the fiscal year ending February 1, 2025, with expectations for these credit protection measures to stay relatively stable over the forthcoming 12 months.

Kroger's ongoing investment in technology, such as its 6% stake in British online grocery firm Ocado Group (LON:OCDO) plc, exemplifies its commitment to enhancing customer experience and securing future growth. These strategic investments are backed by Kroger's financial resilience and cash flow capabilities. The company's liquidity is further fortified by a strong free cash flow of nearly $900 million and approximately $4.0 billion in unrestricted cash as of February 1, 2025. Additionally, Kroger has access to a fully available $2.75 billion revolving credit facility, with a $2.0 billion option, set to expire on September 13, 2029. This facility primarily serves as a safety net for commercial paper issuances.

Moody's also outlined conditions that could lead to a potential upgrade or downgrade of Kroger's ratings in the future. An upgrade could be on the horizon if Kroger significantly increases its share of food sales across major markets and demonstrates sustained growth in identical store sales. For an upgrade, Kroger would also need to show continued improvement in credit metrics, with debt/EBITDA nearing 2.5x and EBIT/interest consistently above 5.5x.

Conversely, a downgrade could occur if Kroger's market position weakens, as indicated by negative trends in identical store sales or operating margins falling behind those of its peers. Quantitatively, a downgrade might be considered if debt/EBITDA exceeds 3.5x or if EBIT/interest stays below 4.0x. Additionally, a downgrade could be triggered by aggressive shareholder enhancements or labor disputes that adversely affect Kroger's operating performance.

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