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Shares of Kroger (NYSE:KR) have risen some 5% over the past trading week. The operator of supermarkets and multidepartment stores operating under a range of different names reported a strong set of third-quarter results on Thursday.

Third-Quarter Results

Kroger reported third-quarter revenues of $21.81 billion, up 5.9% compared to the year before. Growth was driven by a 3.2% increase in identical supermarket sales. Excluding fuel sales, revenues were up by 3.7%. Revenues came in ahead of analysts estimates of $21.55 billion. Gross margins fell 25 basis points to 20.35% on a FIFO accounting basis.

The company reported a net income of $316.5 million, or $0.60 per diluted share. Earnings were inflated as a result of the settlement with Visa (NYSE:V) and MasterCard (NYSE:MA), which boosted earnings by $0.14 per diluted share. Adjusted earnings per share came in at $0.46, compared to $0.33 in the third quarter of last year. Adjusted earnings beat analysts consensus by three cents.

During the quarter, Kroger repurchased 14.5 million of its own stock, for a total consideration of $333 million. CEO and Chairman David B. Dillon commented on the results:

Kroger achieved our growth objectives for the quarter, including positive identical supermarket sales, operating profit growth and outstanding tonnage growth. This quarter illustrates that the strength of our core business positions Kroger to accelerate our earnings per share growth.

Outlook

On the back of the strong third-quarter results, Kroger has raised its full-year outlook. Full-year diluted earnings per share are expected to come in between $2.44 and $2.46 per share, up from $2.35 to $2.42 guided earlier. Analysts expected Kroger to guide for annual earnings of $2.41 per share. Kroger expects fourth-quarter identical supermarket sales growth between 3 and 3.5%, excluding the impact of fuel sales.

Valuation

Kroger ended its third quarter with $435 million in cash and equivalents. The company operates with $8.9 billion in short- and long-term debt, for a net debt position of roughly $8.5 billion.

For the first nine months of 2012, Kroger generated revenues of $72.6 billion. The company net earned $1.03 billion, or $1.89 per diluted share. The company is on track to generate annual revenues of $95 billion this year, on which the company could earn roughly $1.25 billion, or $2.45 per diluted share.

The market currently values Kroger at $13.5 billion. Based on the 2012 outlook, this values the firm at roughly 0.14 times annual revenues and 10-11 times annual earnings. Kroger currently pays a quarterly dividend of $0.15 per share, for an annual dividend yield of 2.3%.

Some Historical Perspective

Year to date, shares of Kroger have risen a modest 8%. Shares started the year at $24 per share, and fell to lows of $21 during the summer. Shares recovered from that point in time, currently exchanging hands at year highs of $26 per share.

Shares of Kroger have reached an all-time high of $31 in 2007. Shares fell back to $20 during the crisis and traded in a tight $20-$25 trading range ever since. Between 2008 and 2012, Kroger grew annual revenues from $76 billion in 2008 to an estimated $95 billion this year. Earnings-per-share growth accelerated after Kroger repurchased a fifth of its shares outstanding.

Investment Thesis

Kroger had a decent third quarter and is looking with confidence into its fourth quarter. Kroger continues to grow consistently, as it achieved its 36th consecutive quarter of positive identical supermarket sales growth. While the company notes that the economy is recovering, many of the consumers are still struggling. This is not necessarily bad news for Kroger, as its customers still perceive good value at the chain.

Kroger is also quick to adjust the changing shopping habits. The company has experimented with new large "Marketplace" stores which sell general merchandise besides groceries. Smaller "Ruler" stores focus on cheaper products. The company is recognizes that the boundaries between supermarkets, dollar stores, and general retailers are blurring.

Kroger is an excellent investment. Shares are valued at a fair 10-11 times annual earnings, while the company pays a decent 2.3% dividend yield. Prospects look reasonably good as underlying revenue growth has been strong, and earnings growth is boosted by share repurchases.

Source: Kroger - Value In Shares Of This Value Chain