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Kroger (KR) Q4 Earnings Meet Estimates, Decline Y-o-Y

Zacks Equity Research

After delivering a negative earnings surprise of 2.4% in the third quarter, The Kroger Company KR reported in line earnings in the fourth quarter of fiscal 2016. The grocery retailer posted quarterly earnings of 53 cents a share that met the Zacks Consensus Estimate but declined 7% from 57 cents earned in the prior-year quarter. Shares were down over 4% during pre-market trading hours.

Management now projects fiscal 2017 earnings in the band of $2.21 to $2.25 per share, with 9 cents coming from the 53rd week. The Cincinnati-based company kept its long term earnings per share growth rate target of 8% to 11% intact. The current Zacks Consensus Estimate for fiscal 2017 stands at $2.25.

Total sales grew 5.5% to $27,611 million from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $27,357 million, marking the second straight quarter of revenue beat. Management stated that excluding fuel center sales, total sales rose 4.4%. Management stated that recent buyouts of Roundy's and 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 0.7% to $21,981 million, whereas including fuel center sales, identical supermarket sales inched up 0.6% to $24,453 million. Kroger envisions 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 one year. Over the said period, the stock has declined 15.2%, while the industry has advanced 4.1%.

Operating income declined 7.5% year over year to $858 million, whereas operating margin contracted 50 basis points to 3.1%.

Other Financial Aspects

Kroger, which shares space with Whole Foods Market, Inc. WFM, ended the quarter with cash of $310 million, total debt of $14,077 million, and shareholders’ equity of $6,710 million. Total debt increased $1,998 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.31 compared with 2.08 in the year-ago period. During fiscal 2016, the company bought back $1.8 billion and paid $429 million in dividends.

Management projects capital expenditures – excluding mergers, acquisitions and purchases of leased facilities – for fiscal 2017 to be in the range of $3.2 to $3.5 billion. Capital investments for fiscal 2016 totaled $3.6 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. The company added over 420 ClickList locations for 640 online ordering service locations. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

Kroger, which operates 2,796 retail food stores, maintain a Zacks Rank #3 (Hold). Better ranked stocks include Conagra Brands, Inc. CAG and Pinnacle Foods Inc. PF both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conagra Brands delivered an average positive earnings surprise of 13.3% over the trailing four quarters and has a long-term earnings growth rate of 8%.

Pinnacle Foods delivered an average positive earnings surprise of 1.7% over the trailing four quarters and has a long-term earnings growth rate of 8.3%.

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