Kroger Stays Neutral - Analyst Blog


The Kroger Company ( KR ) holds a significant position among the nation's largest grocery retailers, and remains committed to battle the tough economy, and keep their head high.   

The Company Counts Upon

Kroger's strong corporate and national brands help gain customers' loyalty, sustain top-line growth, expand its store base and boost its market share.

The company's customer-centric business model provides a strong value proposition for the consumers and positions it well to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel). Identical supermarket sales are expected to grow 4.5% to 5% for fiscal 2011, up from the earlier projection of 4% to 5% rise.

Management continues to deploy capital to concentrate more on remodeling, merchandising and other viable projects. These include nearly 30 to 40 major capital projects comprising store openings, expansions and relocations, and 130 to 140 remodels. Management expects fiscal 2011 capital expenditure to be marginally above $1.9 billion.

Efforts Reaping Results

Kroger recently delivered better-than-expected third-quarter 2011 results, thereby prompting management to raise its fiscal 2011 earnings guidance. The quarterly earnings of 33 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 3.1% from the year-ago level of 32 cents.

The Cincinnati-based company now expects fiscal 2011 earnings between $1.95 and $2.00 per share, up from a range of $1.85 to $1.95 forecasted earlier. The current Zacks Consensus Estimate for fiscal 2011 is $2.00, supported by 17 analysts covering the stock.

Total revenue (including fuel center sales) climbed 10.3% year over year to $20,594.3 million, and handily beat the Zacks Consensus Estimate of $20,430 million.

Excluding fuel center sales, total revenue rose 5.1% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 5% to $15,524.9 million.

Challenging Economy & Intense Competition

The economy is fraught with risks, and Kroger is not immune to it. 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 Wal-Mart Stores Inc. ( WMT ) and Costco Wholesale Corporation ( COST ).

The grocery business is highly competitive and fragmented, and Kroger faces intense competition from big players, like Supervalu Inc. ( SVU ), 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 third-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $7,689.8 million, reflecting a debt-to-capitalization ratio of 61%, which is substantially higher, and could adversely affect the company's credit worthiness, thereby making it more susceptible to the macroeconomic factors and competitive pressures.

Closing Remark

The above analysis supports our unbiased view on the stock, and therefore we uphold our long-term Neutral recommendation on Kroger, which operates 2,439 supermarkets and multi-department stores in 31 states under approximately 24 local banners. However, Kroger's shares hold a Zacks #2 Rank that translates into a short-term Buy rating, and well defines the better-than-expected third-quarter 2011 results and increased earnings outlook.

COSTCO WHOLE CP ( COST ): Free Stock Analysis Report
KROGER CO ( KR ): Free Stock Analysis Report

SUPERVALU INC ( SVU ): Free Stock Analysis Report
WAL-MART STORES ( WMT ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: COST , KR , SVU , WMT

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