Kroger Beats, Lifts Outlook - Analyst Blog

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The Kroger Company ( KR ), one of the largest grocery retailers, 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 Zacks Consensus Estimate had remained constant with none of the 16 analysts following the stock revised their estimates in the last 30 or 7 days.

However, it is to be noted that although earnings per share increased, the company registered a decline in the net income. Net income fell to $195.9 million during the quarter under review from $202.2 million in the year-ago period. The share repurchase activity provided cushion to the company's earnings per share.

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 forecasted earlier.

The current Zacks Consensus Estimate of $1.96 for fiscal 2011 remains a penny ahead of the company's low-end of the guidance range. In the coming days, we could witness a correction in the Zacks Consensus Estimates with analysts tweaking their estimates to better align with company's earnings outlook.

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.

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 4.5% to 5% for fiscal 2011, up from 4% to 5% rise projected previously.

Including fuel center sales, identical supermarket sales jumped 9.4% to $18,418.1 million. We believe that Kroger's dominant position enables it to sustain top-line growth, expand store base, and boost market share.

Kroger's customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

However, Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger's sales and margins.

Kroger ended the quarter with cash of $207.6 million, temporary cash investments of $8.2 million, and total debt of $7,689.8 million, reflecting a debt-to-capitalization ratio of 61%, and shareholders' equity of $4,899 million. Net debt increased $476.6 million from the prior-year. Trailing-twelve months' net total debt to EBITDA ratio was 1.89 compared with 1.93 in the same period last year.

Capital investment, exclusive of acquisitions and purchases of leased facilities, aggregated $497 million for the quarter under review.

During the quarter, Kroger bought back 21 million shares for an aggregate amount of $471.2 million. The company's healthy free cash flow generating ability has facilitated it to return over $1.8 billion to shareholders via dividends and share repurchases.

The company currently operates 2,439 supermarkets and multi-department stores in 31 states under approximately 24 local banners. 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

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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