Earnings Scorecard: Kroger


The Kroger Company (KR) posted its second-quarter 2012 results on September 7, 2012. Here we will discuss the company’s scorecard, based on the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Kroger recently posted better-than-expected second-quarter 2012 results on the back of Customer 1st strategy and effective cost management.

The quarterly earnings of 51 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 24.4% from 41 cents earned in the prior-year quarter. Share repurchase activities provided cushion to the bottom line. The prior-year quarter earnings exclude tax benefit adjustments.

Total revenue (including fuel center sales) climbed 3.9% to $21,726.4 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $21,983 million.

Healthy results prompted management to raise the outlook. The Cincinnati-based Kroger now envisions fiscal 2012 earnings between $2.35 and $2.42 per share, up from a range of $2.33 to $2.40 forecasted earlier. Management expects to attain the higher end of the guidance range.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Whole Foods Market Inc. (WFM), reiterated its identical supermarket sales (excluding fuel) growth guidance of 3% to 3.5% for fiscal 2012. Management expects to accomplish the upper end of the forecasted range.

(Read our full coverage on this earnings report: Kroger Beats, Ups Outlook)

Agreement of Estimate Revisions

The agreement of estimate revisions indicates that majority of the analysts were unidirectional, following Kroger’s second-quarter 2012 results.

In the last 30 days, 5 out of 19 analysts covering the stock raised their estimates, whereas 2 analysts lowered the same for the third quarter of 2012. For the fourth quarter, 7 analysts made upward revisions, whereas only 2 analysts trimmed their estimates.     

For fiscal 2012, 15 analysts revised their estimates upward, and none lowered the same in the last 30 days. For fiscal 2013, 12 analysts increased their estimates upward, while only one analyst lowered the same in the same time frame.

What Drives Estimate Revision

Clearly, a positive sentiment is palpable among most analysts, who remain optimistic on Kroger’s performance. Following the earnings release, the Zacks Consensus Estimate has been portraying an upward trend with majority of the analysts remaining bullish on the stock. Analysts have been revising their estimates to better align with the company’s projection.

Analysts remained confident about the stock in the near term, betting on Kroger’s dominant position among the nation’s largest grocery retailers. The company’s strong corporate and national brands help gain customers’ loyalty, sustain top-line growth, expand its store base and boost its market share.

However, some of the analysts remained on the back foot as they are concerned about the sluggish economic recovery and erratic consumer behavior. Further, the company’s top line missing the Zacks Consensus Estimate also compelled analysts to prune their estimates.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.      

The Zacks Consensus Estimate for the third quarter of 2012 remained constant at 42 cents a share in the last 30 days, as the revisions made by the analysts had a neutral impact on the Zacks Consensus. The Zacks Consensus Estimate for the fourth quarter moved up by a penny to 68 cents in the same time frame. 

The Zacks Consensus Estimates for both fiscal 2012 and 2013 jumped 3 cents to $2.41 and $2.55, respectively, in the last 30 days.

Let’s Conclude

Kroger’s customer-centric business model provides a strong value proposition for consumers and positions it well to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel).

Management continues to deploy capital to concentrate more on remodels, merchandising and other viable projects. These include nearly 40 to 50 major capital projects comprising new store openings, expansions and relocations, and 125 to 140 remodels. Management continues to expect fiscal 2012 capital expenditures in the range of $1.9 billion to $2.2 billion.

The company’s healthy free cash flow generating ability has facilitated it to return over $1.9 billion to stakeholders via dividends and share repurchases in the trailing four quarters. Most recently, Kroger hiked its quarterly dividend by about 30%, bringing the annualized payout to 60 cents per share from the earlier level of 46 cents. Management hinted that the company would sustain its shareholder friendly moves in fiscal 2012 with the long-term goal of enhancing shareholder return by approximately 8% to 10%.

The economy is not devoid of risks, and Kroger is not immune. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins. The recent economic downturn and heavy job losses have transformed the way consumers used to shop. Cash-strapped consumers are now prioritizing their purchases, choosing cheaper substitute brands and shopping for groceries at low-price leaders like Wal-Mart and Costco Wholesale Corporation (COST).

The grocery business is highly competitive and fragmented, and Kroger faces intense competition from big players, like Supervalu Inc. (SVU), and other conventional and specialty gourmet retailers with respect to price, store expansion, and promotional activities to drive traffic. This might weigh upon the company’s performance.

Further, higher debt-to-capitalization ratio also remains a major concern. Kroger ended second-quarter 2012 with a long-term debt (including obligations under capital leases and financial obligations) of $8,126.6 million, reflecting a debt-to-capitalization ratio of 68.2%, which is substantially higher, and could adversely affect the company’s credit worthiness and make it more susceptible to the macroeconomic factors and competitive pressures.

The above analysis supports our unbiased view on the stock, and therefore we uphold our long-term Neutral recommendation on Kroger, which operates 2,425 supermarkets and multi-department stores in 31 states under approximately 24 local banners.

The company’s shares hold a Zacks #2 Rank, which translates into a short-term Buy rating, and well defines the company’s earnings growth potential, customer loyalty program, cost containment efforts, and increase in identical supermarket sales as well as share repurchase activity, providing cushion to the bottom line.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education

Read the Full Research Report on KR

Read the Full Research Report on WFM

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Read the Full Research Report on SVU

Read the Full Research Report on COST

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