Kroger's (KR) Q1 Earnings & Sales Beat Estimates, Stock Up

The Kroger Co. 's KR "Restock Kroger" program gave a solid start to fiscal 2018. After reporting in line earnings in the final quarter of fiscal 2017, this grocery retailer posted better-than-expected first-quarter results prompting management to raise the lower end of fiscal 2018 earnings view. As a result, the stock is up roughly 9% during pre-market trading hours.

The company delivered adjusted earnings of 73 cents a share that surpassed the Zacks Consensus Estimate of 63 cents and increased 25.9% from the prior-year quarter. This Cincinnati, OH-based company now envisions adjusted earnings in the range of $2.00-$2.15 per share compared with the prior forecast of $1.95-$2.15. The current Zacks Consensus Estimate for fiscal 2018 stands at $2.06.

Total sales grew 3.4% to $37,530 million from the prior-year quarter and also came ahead of the Zacks Consensus Estimate of $37,212 million, marking the seventh straight quarter of revenue beat. Excluding fuel center sales, total sales rose 2.3%. Excluding fuel and the recently-sold convenience store business unit, total sales jumped 2.8%. Digital sales surged 66% during the quarter under review.

The grocery industry has been undergoing a fundamental change, with technology playing a major role and the focus shifting to online shopping. Kroger, which faces stiff competition from bellwethers such as Walmart WMT and Amazon AMZN , has taken the stock of the situation and is in the process of giving itself a complete makeover.

The company is expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. The company's "Restock Kroger" program is also gaining traction. These endeavors are likely to fuel top-line growth. The grocery industry is no longer shielded from the e-commerce war. Given this scenario, the Ocado deal along with the acquisition of Home Chef is definitely a good move by Kroger to stay abreast in the race.

These endeavors have helped the shares of Kroger to surge 12% in the past three months compared with the industry that declined 2%. We believe that the company's operational strategies present enormous opportunities to augment identical supermarket sales and enhance return on invested capital.

The company's identical supermarket sales, excluding fuel center sales, grew 1.4%. Including Kroger Specialty Pharmacy and ship-to-home solutions - Kroger's identical sales, without fuel, rose 1.9% in the quarter. Kroger now projects fiscal 2018 identical sales growth, excluding fuel, to be in the range of 2-2.5%.

The Kroger Co. Price, Consensus and EPS Surprise

The Kroger Co. Price, Consensus and EPS Surprise | The Kroger Co. Quote

Other Financial Aspects

Kroger ended the quarter with cash of $315 million, total debt of $14,301 million, and shareholders' equity of $6,941 million. Total debt increased $857 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.43 compared with 2.33 in the year-ago period. In the trailing four quarters, the company bought back $2.7 billion of shares and paid $442 million in dividends.

Management continues to project capital expenditures - excluding mergers, acquisitions and purchases of leased facilities - to be approximately $3 billion for fiscal 2018.

Bottom Line

We believe that Kroger's dominant position enables it to expand store base and boost market share. The company's customer-centric business model provides a strong value proposition to consumers. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

Kroger carries a Zacks Rank #3 (Hold). A favorably-ranked stock includes The Chefs' Warehouse, Inc. CHEF having a long-term earnings growth rate of 22% with a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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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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