Kroger Balances Itself - Analyst Blog

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The term "survival of the fittest" goes well with The Kroger Company ( KR ), which holds a dominant position among the nation's largest grocery retailers, and remains committed to balance itself in an economy that is looking for ways to shield itself from the ongoing financial crisis.

Drivers of Growth

Kroger's strong corporate and national brands help gain customers' loyalty, sustain growth in top line, expand its store base and boost its market share.

The company'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). Identical supermarket sales are expected to grow 4.5% to 5% for fiscal 2011, up from 4% to 5% rise projected previously.

Management continues to deploy capital to concentrate more on remodeling, merchandising and other viable projects. These include nearly 30 to 40 major capital projects comprising store openings, expansions and relocations, and 130 to 140 remodels. Management expects fiscal 2011 capital expenditure to be marginally above $1.9 billion.

Optimistic on Better Results

Kroger recently posted better-than-expected third-quarter 2011 results, thereby prompting management to raise its fiscal 2011 earnings guidance. The quarterly earnings of 33 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 3.1% from 32 cents delivered in the prior-year quarter.

The Cincinnati-based Kroger, now expects fiscal 2011 earnings between $1.95 and $2.00 per share, up from a range of $1.85 to $1.95 forecast earlier.

Total revenue (including fuel center sales) climbed 10.3% to $20,594.3 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,430 million.

Excluding fuel center sales, total revenue rose 5.1% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 5% to $15,524.9 million.

Turbulent Economy & Stiff Competition

Kroger is not immune to the economic upheaval. 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. ( WMT ) and Costco Wholesale Corporation ( COST ).

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 third-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $7,689.8 million, reflecting a debt-to-capitalization ratio of 61%, which is substantially higher, and could adversely affect the company's credit worthiness making it more susceptible to the macroeconomic factors and competitive pressures.

Wrapping Up

The above analysis supports our unbiased view on the stock, and therefore we uphold our long-term Neutral recommendation on Kroger, which operates 2,439 supermarkets and multi-department stores in 31 states under approximately 24 local banners. However, Kroger's shares hold a Zacks #2 Rank that translates into a short-term 'Buy' rating, which well defines the better-than-expected third-quarter 2011 results and increased earnings outlook.

COSTCO WHOLE CP ( COST ): Free Stock Analysis Report

KROGER CO ( KR ): Free Stock Analysis Report

SUPERVALU INC ( SVU ): Free Stock Analysis Report

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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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