The Kroger Company
) 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
Last Quarter Synopsis
Kroger recently posted better-than-expected second-quarter 2012
results on the back of Customer 1st strategy and effective cost
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.
Whole Foods Market Inc.
), 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
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
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
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly
reflected through changes in the Zacks Consensus
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
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%
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
Costco Wholesale Corporation
The grocery business is highly competitive and fragmented, and
Kroger faces intense competition from big players, like
), 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
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
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
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KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis
WAL-MART STORES (WMT): Free Stock Analysis
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