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Kroger (KR) Q1 Earnings Beat but Decline Y/Y, Outlook Cut

Zacks Equity Research

After reporting in line earnings in the final quarter of fiscal 2016, The Kroger Company KR commenced fiscal 2017 with a positive earnings surprise. The grocery retailer posted first quarter earnings of 58 cents a share that beat the Zacks Consensus Estimate by a penny but declined 18.3% from the prior-year quarter.Subsequently, management trimmed its earnings projection. As a result, shares are down nearly 12% during pre-market trading hours.

Management now projects fiscal 2017 earnings in the band of $2.00–$2.05 per share down from earlier estimate of $2.21–$2.25. Cincinnati-based companykept its long term earnings per share growth rate target of 8–11% intact. The current Zacks Consensus Estimate for fiscal 2017 stands at $2.22, which could witness a downward revision in the coming days.

Total sales grew 4.9% to $36,285 million from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $35,507 million, marking the third straight quarter of revenue beat. Excluding fuel center sales, total sales rose 2.9%. Management stated that recent buyout of ModernHEALTH added to the growth.

Kroger Company (The) Price, Consensus and EPS Surprise


Kroger Company (The) Price, Consensus and EPS Surprise | Kroger Company (The) Quote

The company’s identical supermarket sales (stores that are open without expansion or relocation for five full quarters), excluding fuel center sales,fell marginally by 0.2% to $28,627 million, whereas includingfuel center sales,identical supermarket sales grew 1.6% to $32,252 million. Kroger continues to envision identical supermarket sales, excluding fuel, to be flat to up 1% in fiscal 2017.

Lately, this supermarket chain has been going through a rough patch. Stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing the provider of daily need items. We observed that the stock has underperformed the Zacks categorized Retail-Supermarkets industry in the past six months. Over the said period, the stock has declined 15.8%, while the industry has advanced 7.9%.

Operating income declined 48.2% year over year to $622 million, whereas operating margin contracted 180 basis points to 1.7%.

Other Financial Aspects

Kroger, which shares space with Whole Foods Market, Inc. WFM, ended the quarter with cash of $335 million, total debt of $13,444 million, and shareholders’ equity of $6,135 million. Total debt increased $1,058 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.33 compared with 2.12 in the year-ago period. In the trailing four quarters, the company bought back $1.5 billion of shares and paid $438 million in dividends.

Management continues to project capital expenditures – excluding mergers, acquisitions and purchases of leased facilities – for fiscal 2017 to be in the range of $3.2–$3.5 billion.

Bottom Line

We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

Kroger, which operates 2,792 retail food stores, maintain a Zacks Rank #4 (Sell). Better ranked stocks include B&G Foods, Inc. BGS and McCormick & Company, Incorporated MKC both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

B&G Foods delivered an average positive earnings surprise of 2% over the trailing four quarters and has a long-term earnings growth rate of 10%.

McCormick & Company delivered an average positive earnings surprise of 3.1% over the trailing four quarters and has a long-term earnings growth rate of 8.8%.

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