Earnings Preview: Kroger - Analyst Blog

The Kroger Company ( KR ), one of the largest grocery retailers, is slated to report third-quarter 2011 financial results before the bell on Thursday, December 1, 2011. The current Zacks Consensus Estimate for the quarter is 31 cents a share. The Zacks Consensus estimates revenue at $20,394 million.

Second-Quarter 2011, a Synopsis

Kroger's quarterly earnings of 41 cents a share jumped 7.9% from 38 cents delivered in the prior-year quarter. Management hinted that the increase in the bottom line remains consistent with Kroger's long-term goal of 6% to 8% growth.

Total revenue (including fuel center sales) climbed 11.5% to $20,913.4 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,477 million.

Excluding fuel center sales, total revenue rose 5.2% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 5.3% to $15,719.5 million. Including fuel center sales, identical supermarket sales jumped 10.4% to $18,715.8 million.

Management Guided

At its last earnings call, the Cincinnati-based company, Kroger, reiterated its fiscal 2011 earnings guidance range of $1.85 to $1.95 per share.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. ( WMT ) and Whole Foods Market Inc. ( WFM ), now predicted identical supermarket sales (excluding fuel) growth of 4% to 5% for fiscal 2011, up from 3.5% to 4.5% rise forecast earlier.

Third-Quarter 2011 Consensus

The analysts polled by Zacks, expect Kroger to post third-quarter 2011 earnings of 31 cents a share. The current Zacks Consensus Estimate reflects a decline of 3.1% from the prior-year quarter. The estimates in the current Zacks Consensus for the quarter range from a low of 26 cents to a high of 36 cents.

Zacks Agreement & Magnitude

Of the 16 analysts following the stock, none of them revisited their estimates in the last 30 or 7 days, thereby keeping the Zacks Consensus Estimate unchanged at 31 cents.

Mixed Earnings Surprise History

With respect to earnings surprises, Kroger has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 4.7% to positive 9.4%. The average remains at positive 3.1%. This suggests that Kroger has beaten the Zacks Consensus Estimate by an average of 3.1% in the trailing four quarters.

Price Stats

Since its last earnings release on September 9, 2011, Kroger's market price has inched up 1.1% to $22.16 on November 25, 2011. During trading hours on November 25, the stock reached the day low of $21.68 and the day high of $22.27. The stock price is within the range of the 52-week low-high range of $20.53 attained on December 10, 2010 and $25.85 achieved on July 20, 2011. Over the period from September 9, 2011 to November 25, 2011, the stock dropped to a low of $21.14 on September 12, 2011 and rose to a high of $23.65 on October 28, 2011.

Let's Conclude

A dominant position among the nation's largest grocery retailers enables Kroger to sustain growth in the top line, expand its store base, and boost its market share. The company's strong corporate and national brands inspire customers' loyalty.

Kroger's customer-centric business model provides a strong value proposition to consumers and positions it well to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel).

Management continues to deploy capital to concentrate more on remodeling, merchandising, and other viable projects. These include nearly 25 to 35 major capital projects comprising opening of new stores, expansions and relocations, and 130 to 140 remodels. Management expects fiscal 2011 capital expenditure to be marginally above $1.9 billion.

Kroger is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. The company expects to generate shareholders return of 8% to 10% over a period of 3 to 5 years.

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 dent the company's sales and margins.

Higher debt-to-capitalization ratio also remains a matter of concern. Kroger ended second-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $7,347.4 million, reflecting a debt-to-capitalization ratio of 58.5%, which is substantially higher, and could adversely affect the company's credit worthiness and make it more susceptible to the macroeconomic factors and competitive pressure.

Currently, we have a long-term 'Neutral' rating on the stock. Moreover, Kroger's shares maintain a Zacks #3 Rank that translates into a short-term 'Hold' recommendation and correlates with our long-term view.

KROGER CO ( KR ): Free Stock Analysis Report

SUPERVALU INC ( SVU ): Free Stock Analysis Report

WHOLE FOODS MKT ( WFM ): Free Stock Analysis Report

WAL-MART STORES ( WMT ): Free Stock Analysis Report

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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