We maintain our Neutral recommendation on
The Kroger Company
) with a target price of $35.00 following the company's
first-quarter fiscal 2013 results.
Why the Reiteration?
We believe that a dominant position among the nation's largest
grocery retailers enables Kroger to sustain its 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
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 on the back of the Customer 1
strategy. Healthy results prompted management to provide an
upbeat outlook. 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. Total 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.
Alongside, Kroger is 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
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
Further, higher debt-to-capitalization ratio remains a major
concern. Kroger ended the first quarter with a total long-term
debt of $7,946 million, reflecting a debt-to-capitalization ratio
of 63.4%, which is higher, and could negatively 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
Flowers Foods, Inc.
B&G Foods Inc.
Omega Protein Corp.
), all of which hold a Zacks Rank #1 (Strong Buy), and are
expected to continue with their upbeat performance.
B&G FOODS CL-A (BGS): Free Stock Analysis
FLOWERS FOODS (FLO): Free Stock Analysis
KROGER CO (KR): Free Stock Analysis Report
OMEGA PROTEIN (OME): Free Stock Analysis
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