The Kroger Company (KR) stands tall amid nagging economic woes and an uneven recovery. We maintain our Neutral recommendation on this stock that has shown resilience over time.
Why the Reiteration?
We believe that a dominant position among the nation’s largest grocery retailers enables Kroger to sustain top-line growth, expand its store base, and boost market share. The company is also well positioned to deliver higher earnings primarily through strong super market sales (sans fuel) growth. This is well defined from the stock’s Zacks Rank #2 (Buy) and evident from its fourth-quarter fiscal 2012 results.
The quarterly earnings of 88 cents a share beat the Zacks Consensus Estimate of 70 cents, and rose from 50 cents in the year-ago quarter. Total sales climbed 12.8% during the quarter. Buoyed by better-than-expected results, management now envisions fiscal 2013 earnings between $2.71 and $2.79 per share, reflecting year-over-year increase of 8% to 11%, which is equivalent to the company’s long-term growth rate. Identical supermarket sales are expected to elevate between 2.5% and 3.5% during the fiscal year.
Kroger is also actively managing its capital and returning much of its free cash to shareholders via share buybacks and dividends. Moreover, management continues to deploy capital to concentrate more on remodels, merchandising, and other viable projects.
The economy is not devoid of risks, and Kroger is not immune to such adversities. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins. The recent economic downturn has 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.
Further, higher debt-to-capitalization ratio remains a major concern. Kroger ended fourth-quarter fiscal 2012 with a total long-term debt of $8,879.2 million, reflecting a debt-to-capitalization ratio of 67.8%, which is substantially higher, and could adversely affect the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.
Other Stocks Worth Considering
Other stocks worth considering in the food and miscellaneous diversified sector include J&J Snack Foods Corp. (JJSF) , which holds a Zacks Rank #1 (Strong Buy) and Kraft Foods Group, Inc. (KRFT) and Campbell Soup Company (CPB), both of which carry a Zacks Rank #2 (Buy).
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