Are Kroger's Q4 Earnings Estimates Too Low?

| About: Kroger Co. (KR)

Kroger (NYSE:KR), the largest US supermarket operator, is slated to report its 4th quarter earnings this Thursday, March 3rd, before market open. The company is forecasted to earn 44 cents (a 12.8% increase versus 39 cents) on sales of $19.36 billion (a 4.37% rise versus $18.55 billion).

In its third quarter report (see conference call transcript here), the company guided its 2010 earnings range from $1.65 to $1.78 and hinted that it intends to achieve the upper half of that range; since the company has already earned $1.31 in its first three quarters, the math needed for KR to achieve its 2010 guidance, computes to a 4th quarter, producing a bottom line of anywhere between 34 to 47 cents.

I am going to go out on a limb here and proclaim that the company will exceed expectations; I'm hoping that management is clever enough to realize the paramount importance of under promising in order to over deliver.

Why they should beat: The mega grocer should earn $0.46 on a top line of $19.4 billion, based on the following:

  1. a 2.5% reduction in its shares outstanding
  2. a 16% drop in its interest expense
  3. a 300 basis point decrease in its income tax rate from 35% to 32%; and
  4. a revenue beat of $40 million (based on raised identical supermarket sales growth of 50 basis points from the bottom end of its previous range).

Further assumptions include:

  1. a gross profit margin contraction from 22.5% to 22.1%
  2. operating, general and administrative costs flat at 17%; and
  3. rent at 0.8% and depreciation at 1.95% of sales

Bottom line: KR has a history of beating earnings estimates; in fact, they beat by $0.05 the last time they reported their fourth quarter results. This time around the beat will only be by two cents, but it should be more than enough to drive the share price 5% higher within minutes of the release.

Disclosure: I am long KR.