Kroger Earnings Report Raises Some Flags

| About: Kroger Co. (KR)

By Carolyn Austin

Kroger (NYSE:KR) topped the retail grocery sector Tuesday with a nice jump in share price following its early morning earnings report [see transcript].

Excluding the volatile fuel component, Kroger’s store sales increased 3.3 percent and same store sales were up 2.6 percent from the year-ago quarter. The supermarket chain reported $0.41 earnings per share, beating consensus estimates of $0.36 per share for the quarter and $0.39 per share for the year-ago period. Reduced expenses and a stock buyback program helped boost the earnings-per-share number.

David B. Dillon, Kroger’s chairman and chief executive officer, attributed the sales growth to customer loyalty and customer service. “Our team understands the importance of finding ways to make each customer visit better than the last one, resulting in consistent positive identical supermarket sales growth,” he said.

The company maintained its outlook of $1.60 to $1.80 per share for fiscal year 2010.

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Drilling down to the details in the report raises some flags for the nation’s largest traditional grocery retailer. Gross margins are declining notwithstanding the FIFO costing method (LIFO is commonly used to reduce reported profits and minimize taxes). The implication is that the decline in gross margin would be even greater if the higher LIFO inventory cost basis was used. And excluding the fuel component, general operating expenses increased from the year-ago quarter. Debt is up slightly and net earnings for fiscal year 2010 ($0.98) are lower than the same six-month period in 2009 ($1.05). Although the company continues to invest in growing the business, it looks like the nontraditional grocery outlets will continue to eat into Kroger’s margins. On the technical side, the thin trading volume shows weak support for the price boost.

Disclosure: No positions