Kroger: Earnings Scorecard

| About: Kroger Co. (KR)

The Kroger Company (NYSE:KR), one of the largest grocery retailers, posted second-quarter 2010 results on September 14, 2010 that outpaced the Zacks’ expectations.

Street analysts had nearly a week to digest the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Review
Kroger’s quarterly earnings of 41 cents a share surpassed the Zacks Consensus Estimate of 36 cents, and jumped 5.1% from 39 cents delivered in the prior-year quarter.

Total revenues (including fuel center sales) climbed 6% to $18,795.9 million from the prior-year quarter, and barely beat the Zacks Consensus Revenue Estimate of $18,764 million.

Excluding fuel center sales, total revenue climbed 3.3%; comparable supermarket sales jumped 2.9% to $15,328.9 million, whereas identical supermarket sales (stores that are open without expansion or relocation for five full quarters) rose 2.7% to $14,947.4 million.

Guidance Reaffirmed
The Cincinnati-based company, Kroger, reaffirmed its fiscal year 2010 earnings guidance range of $1.60 to $1.80 per share that dovetails with the current Zacks Consensus Estimate of $1.77.

Kroger, which faces stiff competition from
Wal-Mart Stores Inc. (NYSE:WMT) and Whole Foods Market Inc. (WFMI), also confirmed identical supermarket sales (excluding fuel) growth of 2% to 3% for fiscal year 2010, although down from an average growth of 4.1% achieved in the last three years, given the economic conditions.

(Read our full coverage on this earnings report: Kroger Outpaces Zacks Estimate)

Agreement of Estimate Revisions
We witnessed a lack of direction in the agreement among analysts. In the last 7 days, 4 out of 17 analysts covering the stock lifted their third-quarter 2010 earnings estimates following better-than-expected results. Again 4 analysts lowered their estimates for the quarter, as they remained cautious about the prevailing competitive environment and the sluggish recovery in the economy.

For fiscal 2010, 8 analysts upped their estimates with none lowering their estimates in the last 7 days. The analysts expect fiscal 2010 earnings to lie at the high-end of the guidance range, as evident from our Zacks Consensus Estimate of $1.77 per share.

Magnitude of Estimate Revisions
In the last 7 days, the Zacks Consensus Estimate for third-quarter 2010 has remained stagnant at 31 cents, but for the fourth quarter it has dropped by a penny to 47 cents a share. For fiscal 2010, the Estimate jumped 4 cents to $1.77, and for fiscal 2011, the Estimate rose 2 cents to $1.95, in the last 7 days.

The estimates in the current Zacks Consensus for third-quarter 2010 range from a low of 26 cents to a high of 35 cents. For fiscal 2010, the estimates range from $1.65 to $1.83.

Kroger Holds Zacks #3 Rank
Kroger shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Our long-term rating on the stock remains ‘Neutral’.

A dominant position among the nation’s largest grocery retailers enables Kroger to sustain top-line growth, expand its store base, and boost its market share. The company is well positioned to deliver higher earnings primarily through strong super market sales (sans fuel) growth. Kroger is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. The company recently raised its quarterly dividend by 10.5% to 42 cents a share. This is the fourth time the company has hiked its dividend since the inception of the program in 2006.

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. Moreover, higher debt-to-capitalization ratio also remains a matter of concern. Kroger ended second-quarter 2010 with a long-term debt of $7,817 million, representing a debt-to-capitalization ratio of 60.2%.