Kroger: Earnings Preview

Dec. 1.10 | About: Kroger Co. (KR)

The Kroger Company (KR), one of the largest grocery retailers, is slated to report its third-quarter 2010 financial results before the bell on Thursday, December 2, 2010. The current Zacks Consensus Estimate for the quarter is earnings of 31 cents a share. For the quarter to be reported, the Zacks Consensus Estimate for revenue is $18,524 million.

Second-Quarter 2010, a Synopsis
Kroger’s second-quarter 2010 results outpaced the Zacks’ expectations. The 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 revenue (including fuel center sales) climbed 6% to $18,795.9 million from the prior-year quarter, and handily 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.

Management Guidance
The Cincinnati-based company, Kroger, at its last earnings call reaffirmed its fiscal year 2010 earnings guidance range of $1.60 to $1.80 per share.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (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.

Third-Quarter 2010 Zacks Consensus
The analysts covered by Zacks, expect Kroger to post third-quarter 2010 earnings of 31 cents a share. The current Zacks Consensus Estimate reflects a growth of 14.8% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 29 cents and 33 cents a share.

The current Zacks Consensus Estimate has remained stagnant over the last 30 days, with only 1 out of 17 analysts covering the stock revising the estimate upward. In the last 7 days, none of the analyst revisited their estimates, leaving the consensus unchanged.

Earnings Surprise History

With respect to earnings surprises, Kroger has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 25% to positive 14.7%. The average remained at positive 2.8%. This suggests that Kroger has outperformed the Zacks Consensus Estimate by an average of 2.8% in the last four quarters.

Kroger in Neutral Lane
We believe that the company’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. The company is well positioned to continue its growth momentum primarily through identical supermarket sales growth. Kroger is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends.

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.

The company currently operates 2,468 supermarkets and multi-department stores in 31 states under approximately 24 local banners. Kroger’s shares maintain a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation. However, we have a long-term Neutral rating on the stock.