Kroger: Earnings, Revenue Jump

| About: Kroger Co. (KR)

The Kroger Company (KR), one of the largest grocery retailers, recently posted third-quarter 2010 results. The quarterly earnings of 32 cents a share came in line with the Zacks Consensus Estimate, and jumped 18.5% from 27 cents delivered in the prior-year quarter.

The Zacks Consensus Estimate rose by a penny prior to the earnings announcement with 2 out 17 analysts covering the stock raising their projections in the last 7 days.

The Cincinnati-based company, Kroger, now expects fiscal 2010 earnings between $1.65 and $1.78 per share. The current Zacks Consensus Estimate of $1.78 lies at the high-end of the company’s guidance range. Earlier, the company had forecasted earnings in the range of $1.60 to $1.80.

Total revenue (including fuel center sales) climbed 5.9% to $18,697.9 million from the prior-year quarter, and handily beat the Zacks Consensus Revenue Estimate of $18,524 million.

Excluding fuel center sales, total revenue rose 3.1%; comparable supermarket sales jumped 2.7% to $15,219.7 million, whereas identical supermarket sales (stores that are open without expansion or relocation for five full quarters) rose 2.4% to $14,866.6 million.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Whole Foods Market Inc. (WFMI), now predicted identical supermarket sales (excluding fuel) growth of 2.5% to 3% for fiscal 2010, although down from an average growth of 4.1% achieved in the last three years, given the economic conditions. Previously, the company had anticipated identical supermarket sales growth between 2% and 3%.

Including fuel center sales, comparable supermarket sales climbed 4.8% to $17,290.7 million, whereas identical supermarket sales rose 4.5% to $16,887.6 million. We believe that Kroger’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. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

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. Retailers are reluctant to raise prices for the fear of losing traffic.

Kroger ended the quarter with cash of $155.9 million, temporary cash investments of $602 million, and long-term debt of $7,807 million, reflecting a debt-to-capitalization ratio of 59.7%. Trailing-twelve months’ net total debt to EBITDA ratio was 1.93 in line with the same period last year.

During the quarter, Kroger bought back 2.9 million shares at a price of $21.72 per share aggregating $64 million. The company still has $352.5 million at its disposal under the $500 million share repurchase program announced in June 2010.

The company currently operates 2,461 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.