The Kroger Co. (KR) Posts In Line Earnings

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The Kroger Company (KR), one of the largest grocery retailers, recently posted third-quarter fiscal 2013 earnings of 53 cents a share that came in line with the Zacks Consensus Estimate, and surged 15% from 46 cents earned in the prior-year quarter buoyed by Customer 1st strategy. Share repurchase activities also provided cushion to the bottom line.

Including one-time items, quarterly earnings came in at 57 cents a share, down from 60 cents delivered in the year-ago quarter.

The Cincinnati-based Kroger reiterated its fiscal 2013 earnings of $2.73 to $2.80 per share. The current Zacks Consensus Estimate dovetails with the company’s high-end of the guidance range.

Total sales (including fuel center sales) climbed 3.2% to $22,505 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $22,853 million.

Excluding fuel center sales, total sales rose 4.7% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) grew 3.5% to $16,866 million, marking the 40th successive quarter of increase.

Kroger now projects identical supermarket sales (excluding fuel) growth of 3% to 3.5% for the fourth quarter of fiscal 2013.

Including fuel center sales, identical supermarket sales jumped 2.5% to $20,211 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.

Operating income declined 10.4% year-over-year to $534 million due to higher merchandise costs, SG&A expenses and depreciation; whereas operating margin contracted 30 basis points to 2.4%.

Kroger ended the quarter with cash of $242 million, total debt of $8,270 million, reflecting a debt-to-capitalization ratio of approximately 62.4%, and shareholders’ equity of $4,990 million. Net debt declined $525 million from the prior-year period.

Trailing-twelve months’ net total debt to adjusted EBITDA ratio was 1.86 compared with 2.08 in the prior-year period. Return on invested capital on a rolling four quarters basis was 13.4%, up 10 basis points from the prior-year period.

Total capital expenditures during the quarter aggregated $641 million. Management anticipates capital investments of $2.4 billion for fiscal 2013.

During the quarter, Kroger bought back 3.6 million shares for an aggregate amount of $148 million. The company’s healthy free cash flow generating ability has facilitated it to return over $752 million to stakeholders via dividends and share repurchases in the last four quarters.

The company currently operates 2,414 supermarkets and multi-department stores in 31 states 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 better ranked stocks worth considering in the retail sector include Harris Teeter Supermarkets, Inc. (HTSI), The Hain Celestial Group, Inc. (HAIN) and Spartan Stores Inc. (SPTN), all sporting a Zacks Rank #2 (Buy).

HAIN CELESTIAL (HAIN): Free Stock Analysis Report

HARRIS TEETER (HTSI): Free Stock Analysis Report

KROGER CO (KR): Free Stock Analysis Report

SPARTAN STORES (SPTN): Free Stock Analysis Report

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