The Kroger Company
) holds a significant position among the nation's largest grocery
retailers, and remains committed to battle the uneven recovery in
the economy, and keep its head high, while treading the
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 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 between 3% and 3.5% during fiscal 2012. The company's
strategy is also reaping results.
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 opening of new
stores, 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.
Efforts Reaping Results
Kroger recently delivered better-than-expected first-quarter
2012 results, thereby prompting management to raise its fiscal 2012
The quarterly earnings of 78 cents a share beat the Zacks
Consensus Estimate of 72 cents, and rose 11.4% from 70 cents earned
in the prior-year quarter. Share repurchase activities provided a
cushion to the bottom line. The increase in the bottom line came
ahead of Kroger's long-term goal of 6% to 8% growth.
The Cincinnati-based company now expects fiscal 2012 earnings
between $2.33 and $2.40 per share, up from a range of $2.28 to
$2.38 forecast earlier.
Total revenue (including fuel center sales) climbed 5.8% to
$29,064.8 million from the prior-year quarter, but fell short of
the Zacks Consensus Estimate of $29,194 million.
Excluding fuel center sales, total revenue rose 4.3% and
identical supermarket sales (stores that are open without expansion
or relocation for five full quarters) climbed 4.2% to $21,652.7
million marking the 34th successive quarter of increase.
Challenging Economy & Intense Competition
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
Wal-Mart Stores Inc.
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 first-quarter 2012 with a long-term
debt (including obligations under capital leases and financial
obligations) of $8,105.9 million, reflecting a
debt-to-capitalization ratio of 66.6%, 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 adjudge a long-term Neutral recommendation on Kroger,
which operates 2,425 supermarkets and multi-department stores in 31
states under approximately 24 local banners. Moreover, Kroger's
shares hold a Zacks #3 Rank that translates into a short-term
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