The Kroger Company
) holds a significant position among the nation's largest grocery
retailers, and remains committed to counter the uneven recovery
in the economy in order to keep itself afloat.
Positive Factors to Count Upon
Kroger's strong corporate and national brands help gain
customer loyalty, sustain top and bottom lines 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 increase between 3% and 3.5% during the fourth
quarter of fiscal 2012. Alongside, the company's customer 1
strategy is reaping results.
Management continues to deploy capital to concentrate more on
remodels, merchandising, and other viable projects. These include
nearly 40 major capital projects comprising new store openings,
expansions and relocations, and 100 to 125 remodels. The company
expects to build, expand or relocate 50 supermarkets in fiscal
Kroger also remains optimistic about its acquisition of Axium
Pharmacy Holdings Inc., a specialty pharmacy that is expected to
boost the company's drugs offering. Management continues to
expect capital expenditures between $1.9 billion to $2.2 billion
for fiscal 2012 and projected about $2.4 billion for fiscal
Efforts Reaping Results
Kroger's third-quarter 2012 earnings of 46 cents per share
beat the Zacks Consensus Estimate of 43 cents, and rose 39.4%
year over year on the back of Customer 1
strategy, effective cost management and share repurchase
activities. Management now envisions fiscal 2012 earnings between
$2.44 and $2.46 per share, up from a range of $2.35 to $2.42
forecasted earlier. Total revenue (including fuel center sales)
climbed 5.9% to $21,807 million, and also came ahead of the Zacks
Consensus Estimate of $21,664 million.
Challenging Economy & Intense
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 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 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
Further, higher debt-to-capitalization ratio also remains a
major concern. Kroger ended third-quarter 2012 with a total
long-term debt (including obligations under capital leases and
financial obligations) of $8,859.6 million, reflecting a
debt-to-capitalization ratio of 70.2%, which is substantially
higher, and could adversely affect the company's credit
worthiness and make it more susceptible to the macro-economic
factors and competitive pressures.
The above analysis supports our unbiased view on the stock,
and therefore we continue to adjudge a long-term Neutral
recommendation on Kroger, which operates 2,422 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 'Hold' rating.
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