We maintain our Neutral recommendation on
The Kroger Company
) with a target price of $42.00 following the company's
second-quarter fiscal 2013 results. The company also retained a
Zacks Rank #3 (Hold).
Why the Reiteration?
A dominant position among the nation's largest grocery
retailers enables Kroger to sustain growth in top and bottom
lines, expand its store base, and boost its market share by
introducing new items. The company posted quarterly earnings of
60 cents a share that surged 17.6% year over year, buoyed by the
Customer 1st strategy. Total sales climbed 4.6% during the
The company's strong corporate and national brands helped gain
customer loyalty. We believe that given the company's strong
identical store sales growth for about 39 successive quarters and
strong bottom-line performance, Kroger is poised to achieve its
long-term earnings per share growth rate target of 8% to 11%.
Management reiterated fiscal 2013 earnings between $2.73 and
Management continues to deploy capital to concentrate more on
remodels, merchandising and other viable projects. These include
nearly 45 to 50 major capital projects comprising new store
openings, expansions and relocations, and 130 to 160
Kroger also remains optimistic about its acquisition of
regional grocer, Harris Teeter Supermarkets for $2.44 billion in
cash. It will provide Kroger an opportunity to expand its
footprint in high-growth markets including Delaware, Florida,
Maryland and Washington.
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
the company'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.
Further, higher debt-to-capitalization ratio remains a major
concern. Kroger ended second-quarter fiscal 2013 with a total
long-term debt (including obligations under capital leases and
financial obligations) of $7,892 million, reflecting a
debt-to-capitalization ratio of 62%, which is substantially
higher, and could adversely affect the company's creditworthiness
and make it more susceptible to the macro-economic factors and
The pros and cons of the stock fairly support our unbiased
Other Stocks Worth Considering
Other stocks worth considering in the food-miscellaneous
Pinnacle Foods Inc.
) holding a Zacks Rank #1 (Strong Buy), and
Green Mountain Coffee Roasters, Inc.
Dole Food Co. Inc.
) both carrying a Zacks Rank #2 (Buy).
DOLE FOOD CO (DOLE): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
KROGER CO (KR): Free Stock Analysis Report
PINNACLE FOODS (PF): Free Stock Analysis
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