Kroger: Correction Offers Attractive Entry Point For This Well-Run Company

| About: Kroger Co. (KR)

Shares of Kroger (NYSE:KR) fell in Thursday's trading session following the release of the company's first quarter results before the market open.

The company remains on track to generate long-term earnings per share growth of 8-11%, while trading at attractive levels. Shares offer appeal after the latest correction.

First Quarter Results

Kroger generated first quarter revenues of $30.0 billion, up 3.4% on the year before. Excluding fuel sales, revenues were up by 3.8%. Revenues just missed consensus estimates of $30.2 billion.

Net earnings rose by 9.6% to $481 million. As a result of recent sizable share repurchases, earnings per share rose by a more impressive 18% to $0.92 per share. Earnings per share came in three cents ahead of consensus estimates.

CEO and Chairman David B. Dillon commented on the first quarter developments:

"Kroger achieved strong sales and record earnings per share for the quarter, and our customers' positive view of us continues to improve. This is because of our continued focus on the Customer 1st strategy. Our first quarter results give us the confidence to raise our guidance for the year."

A Look Into The Results

Kroger reported a solid 3.8% identical sales growth, excluding the impact of fuels sales. At roughly half of Kroger's locations, consumers can also fill up their tank.

A disappointment was the 15 basis points decrease in FIFO margins which came in at 20.65%. On the positive side, Kroger managed to reduce operating expenses by 21 basis points, resulting in a slight uptick in operating earnings which came in at $879 million, equivalent to 2.9% of total revenues.

Guidance For The Remainder Of The Year

On the back of the first quarter results, Kroger has narrowed its earnings per share guidance towards $2.73 and $2.80 per share. Previously, Kroger guided for earnings between $2.71 and $2.79 per share. The revised earnings guidance is in line with consensus estimates of $2.77 per share.

Full year identical supermarket sales growth is reiterated to come in between 2.5% and 3.5%.


Kroger ended its first quarter with $247 million in cash and equivalents. The company operates with roughly $7.95 billion in short and long term debt, for a net debt position of around $7.7 billion.

For the full year of 2012, Kroger generated revenues of $96.8 billion, up 7.1% on the year before. Net earnings increased by almost 150% to $1.50 billion.

Factoring in a 6% decline in Thursday's trading session, the market values Kroger at $17.2 billion. This values the firm at almost 0.2 times annual revenues and roughly 12 times 2012's earnings.

Kroger pays a quarterly dividend of $0.15 per share, for an annual dividend yield of 1.8%.

Some Historical Perspective

Shareholders have seen decent returns over the past decade as the company has steadily grown its operations while returning cash to its shareholders.

Shares rose from levels in their mid-teens in 2003 towards $30 by 2007, to fall back towards $20 per share in 2009. Shares traded in a $20-$25 trading range ever since. Since the start of the year, shares have returned some 30%, currently exchanging hands at $33 per share.

Between 2009 and 2012, Kroger has grown its annual revenues by a cumulative 26% to $96.8 billion. Earnings have grown to $1.5 billion in the meantime, while earnings per share growth has been more spectacular as the company retired almost a fifth of its shares outstanding in the meantime.

Investment Thesis

Shares of Kroger are selling off. This is partially to blame on the poor market sentiment following the FOMC meeting, but expectations for the earnings report might have been really high following the strong recent returns.

The company continues to create value for its shareholders by carefully balancing its objectives to repurchase shares, payout dividends, fund expansion, while maintaining its debt rating.

During the quarter, Kroger repurchased 4.5 million shares for $146 million in total, repurchasing its shares at a rate of 3-4% per annum. Its net debt to EBITDA position came in at 1.85 times, within the company's targeted range.

Other than that, it was all business as usual. Kroger has seen solid sales growth driven by an increased household formation, more customer visits and greater average spending. Yet the company sees a robust improvement in the economy which could still be impacted by volatile gas prices, payroll taxes and governmental policies. As a result, Kroger sees a lot of variability in its weekly and daily sales results.

The company remains confident to grow its earnings per share by 8-11% per annum going forward based on further expansion, comparable sales growth, margin expansion and share repurchases.

Back in March, when the company reported its fourth quarter results, I looked at the prospects for Kroger. I concluded that tight expense control and solid growth has propelled shares to all-time highs. From that point in time, shares have risen a bit more, despite Thursday's correction, towards $33 per share.

The solid underlying growth accompanied by a fair valuation at 12 times earnings, accompanied by a decent dividend yield, continues to look appealing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.