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Kroger's Earnings Beat, Ups Outlook

Zacks Equity Research

The Kroger Company (KR), one of the largest grocery retailers, recently posted better-than-expected first-quarter fiscal 2013 results on the back of Customer 1st strategy. The quarterly earnings of 92 cents a share beat the Zacks Consensus Estimate of 88 cents, and surged from 78 cents earned in the prior-year quarter. Share repurchase activities also provided cushion to the bottom line.

Healthy results prompted management to provide an upbeat outlook. The Cincinnati-based Kroger now envisions fiscal 2013 earnings between $2.73 and $2.80, up from a range of $2.71 to $2.79 per share forecasted earlier. The current Zacks Consensus Estimate for fiscal 2013 is $2.77 per share, and is a subject of upward revision in the near term.

Total sales (including fuel center sales) climbed 3.4% to $30,043 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $30,232 million.

Excluding fuel center sales, total sales rose 3.8% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) grew 3.3% to $22,412 million, marking the 38th successive quarter of increase.

Kroger reiterated its identical supermarket sales (excluding fuel) growth of 2.5% to 3.5% for fiscal 2013.

Including fuel center sales, identical supermarket sales jumped 2.9% to $26,945 million. We believe that Kroger’s dominant position enables it to sustain top-line growth, expand store base and boost market share.

Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

However, Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.

Operating income increased 8% year-over-year to $879 million due to top-line growth and decline in rent, whereas operating margin expanded 10 basis points to 2.9%. Adjusted EBITDA grew 5.2% to $4,292 million, whereas EBITDA margin increased 30 basis points to 14.3%.

Kroger ended the quarter with cash of $247 million, total debt of $7,946 million, reflecting a debt-to-capitalization ratio of 63.4%, and shareholders’ equity of $4,596 million. Net debt increased $160 million from the prior-year period.

Trailing-twelve months’ net total debt to adjusted EBITDA ratio was 1.85 compared with 1.91 in the prior-year period. Return on invested capital on a 52-week, rolling four quarters basis was 13.5%, up 10 basis points from the prior-year period.

Total capital expenditures during the quarter aggregated $646 million. Management maintained its capital investments projection of $2.1 billion to $2.4 billion for fiscal 2013.

During the quarter, Kroger bought back 4.5 million shares for an aggregate amount of $146 million. The company’s healthy free cash flow generating ability has facilitated it to return over $1.3 billion to stakeholders via dividends and share repurchases in the last four quarters.

The company currently operates 2,419 supermarkets and multi-department stores in 31 states under approximately 24 local banners. We believe that the company’s strong corporate and national brands helped it gain customer loyalty.

Currently, Kroger’s shares maintain a Zacks Rank #2 (Buy), and well reflects the company’s streak of posting positive earnings surprises. Other stocks worth considering in the retail sector include Flowers Foods, Inc. (FLO), Bon-Ton Stores Inc. (BONT) and Conn’s, Inc. (CONN) all of which carry a Zacks Rank #1 (Strong Buy). All these companies are expected to continue with their upbeat performances.

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Read the Full Research Report on BONT

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Read the Full Research Report on FLO

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