Kroger Q2 Earnings Beat on Higher Sales, Raises Outlook - Analyst Blog

The Kroger Company ( KR ), one of the largest grocery retailers, recently posted second-quarter fiscal 2014 earnings of 70 cents a share that came a penny ahead of the Zacks Consensus Estimate, and surged 16.7% from 60 cents earned in the prior-year quarter, aided by its Customer 1st strategy and the acquisition of Harris Teeter. The better-than-expected results prompted management to raise its earnings guidance.

The Cincinnati-based Kroger now projects fiscal 2014 earnings between $3.22 and $3.28 per share, up from its earlier provided range of $3.19 to $3.27. The current Zacks Consensus Estimate for fiscal 2014 is $3.28 that dovetails with the company's high-end of the guidance.

The Kroger Co - Earnings Surprise | FindTheBest

Total sales (including fuel center sales) grew 11.6% to $25,310 million from the prior-year quarter, and also came ahead of the Zacks Consensus Estimate of $24,914 million. Management stated that excluding fuel center sales, total sales rose 12.4%.

Identical supermarket sales (stores that are open without expansion or relocation for five full quarters) excluding fuel center sales, increased 4.8% to $18,875 million.

Kroger now envisions identical supermarket sales (excluding fuel) growth of 3.5% to 4.25% for fiscal 2014, up from previous projection of 3% to 4%.

Including fuel center sales, identical supermarket sales jumped 5.3% to $22,621 million. We believe that Kroger's dominant position enables it to 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.

Operating income jumped 8.2% year-over-year to $644 million, whereas operating margin contracted 10 basis points to 2.5%.

Kroger ended the quarter with cash of $248 million, total debt of $11,200 million, reflecting a debt-to-capitalization ratio of approximately 69%, and shareholders' equity of $5,022 million. Net debt increased $3,522 million from the prior-year period due to Harris Teeter transaction and share buyback activity.

Trailing-twelve months' net total debt to adjusted EBITDA ratio was 2.33 compared with 1.77 in the prior-year period. Management expects to attain net total debt to adjusted EBITDA ratio of 2.00 to 2.20. Return on invested capital on a rolling four quarters basis was 13.6%.

Total capital expenditures during the quarter aggregated $672 million. Management anticipates capital investments between $2.8 billion and $3 billion for fiscal 2014.

During the quarter, Kroger bought back 1.6 million shares for an aggregate amount of $78 million. The company's free cash flow generating ability has facilitated it to return over $1.9 billion to stakeholders via dividends and share repurchases in the last four quarters.

The company currently operates 2,638 supermarkets and multi-department stores in 34 states and the District of Columbia under approximately 24 local banners. We believe that the company's strong corporate and national brands helped it gain customer loyalty.

Currently, Kroger's shares maintain a Zacks Rank #3 (Hold). Other stocks better ranked stocks include ConAgra Foods, Inc. ( CAG ), The Hain Celestial Group, Inc. ( HAIN ) and J&J Snack Foods Corp. ( JJSF ), all carrying Zacks Rank #2 (Buy).

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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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