Kroger Slides on Fears of Renewed Price Cuts

Dec. 5.10 | About: Kroger Co. (KR)

By David Gibbs

The Kroger Co. (NYSE: KR) is the largest traditional supermarket operator in the U.S., sporting nearly 2,500 supermarkets and multi-department stores, nearly 900 of which operate fuel centers. The company boasts a market cap of $13.5 billion, a 2% dividend and has beaten estimates in nine of the past twelve quarters.

Earnings: 3Q profits of $202.2 million ($0.32/share) vs. a 3Q09 loss of $874.9 million ($1.35/share). Excluding write-downs, 3Q09 EPS was $0.27.

Revenue: Up 5.9% to $18.7 billion. Up 3.1% excluding fuel sales.

Actual vs. Wall St. Expectations: KR met analyst expectations in terms of EPS and beat revenue expectations of $18.53 billion by a slight margin.

Notable Stats: Kroger narrowed its FY2011 EPS guidance to $1.65-$1.78 from $1.60-$1.80. Analysts had forecasted FY2011 EPS of $1.78.

Sales at “identical-stores,” or those that have been open for at least five quarters without expansion or relocation, were up 2.4% excluding fuel sales.

KR cut $100 million of planned capital spending.

Gross margin fell to 22% from 22.6%.

Did You Hear That? CEO David Dillon stated during the conference call that, “Kroger’s customers today are looking for lower prices and a great shopping experience, and our Customer 1st strategy delivers all that and more.”

He further noted that, “our team increased identical supermarket sales, earnings and earnings per share in the third quarter while controlling expenses to keep prices low for our customers. These results show Kroger’s strategy is working and that our core grocery business is strong and resilient.”

Technicals: KR possesses an interesting chart. Since taking a dive from a high of $31 in August 2008, shares have traded in a defined range of, roughly speaking, $19.50-$24.00. Shares actually appeared headed for a breakout leading up to last week’s report, but sub-par data shot shares right back down. Shares are now trading below their 10- and 40-week moving averages, and a test of the lower end of the aforementioned range is likely the new intermediate-term objective.

Commentary: Many on the Street had hoped that the price wars that did so much damage to margins at national grocery chains were a thing of the past. These hopes were bolstered this past September when Kroger announced that they intended to pass price increases on to consumers, but a recent announcement of fresh price cuts by competitor Supervalu Inc. (NYSE: SVU) demonstrated to all that cuts would still be the name of the game. Analysts at S&P reiterated their Hold rating on shares and their 12-month price target of $23. While that target is certainly not unreasonable, it would nonetheless be prudent to wait for shares to work though the recent bad news before toeing the water.

Disclosure: No holdings in KR.