Earnings Scorecard: Kroger

| About: Kroger Co. (KR)

The Kroger Company (NYSE:KR), one of the largest grocery retailers, recently posted second-quarter 2011 results. Street analysts had ample time to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by the analysts as well as the Zacks Rank and long-term recommendation for the stock.

Earnings Report Review

Kroger’s quarterly earnings of 41 cents a share jumped 7.9% from 38 cents delivered in the prior-year quarter. Management hinted that the increase in the bottom-line remains consistent with Kroger’s long-term goal of 6% to 8% growth. Analysts polled by Zacks had expected Kroger to deliver earnings of 43 cents a share.

On a reported basis, including certain tax benefits, earnings came in at 46 cents a share, up 12.2% from 41 cents earned in the year-ago quarter.

Total revenue (including fuel center sales) climbed 11.5% to $20,913.4 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,477 million. Excluding fuel center sales, total revenue rose 5.2% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 5.3% to $15,719.5 million.

Management Guided

The Cincinnati-based company, Kroger, reiterated its fiscal 2011 earnings guidance range of $1.85 to $1.95 per share.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (NYSE:WMT) and Whole Foods Market Inc. (NASDAQ:WFM), has predicted identical supermarket sales (excluding fuel) growth of 4% to 5% for fiscal 2011, up from a 3.5% to 4.5% rise forecasted previously.

Agreement of Estimate Revisions

Following lower-than-expected second-quarter 2011 results, a negative sentiment is palpable among the analysts, and we are witnessing a fall in the Zacks Consensus Estimates.

In the last 7 days, 10 out of 14 analysts covering the stock lowered their estimates for the third and fourth quarters of 2011, with none raising the same.

For fiscal 2011, 6 analysts moved their estimates downwards with 2 analysts raising the same. For fiscal 2012, 6 analysts lowered their estimates and 1 analyst revised the estimate upwards in the last 7 days.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter of 2011 dipped by 2 cents to 31 cents and for the fourth quarter it slipped by 3 cents to 48 cents in the last 7 days.

For fiscal 2011, the Zacks Consensus Estimate dropped by a penny to $1.95, and for fiscal 2012, it slid by 2 cents to $2.15 in the last 7 days.

Kroger in Neutral Lane

A dominant position among the nation’s largest grocery retailers enables Kroger to sustain growth in top-line, expand its store base, and boost its market share. The company’s strong corporate and national brands helped gain customers’ loyalty.

Kroger’s customer-centric business model provides a strong value proposition to consumers and positions it well to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel).

Management continues to deploy capital to concentrate more on remodeling, merchandising, and other viable projects. These include nearly 25 to 35 major capital projects comprising new stores, expansions and relocations, and 130 to 140 remodels. Management expects fiscal 2010 capital expenditure to be marginally above $1.9 billion.

Kroger’s management is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. The company expects to generate shareholders return of 8% to 10% over a period of 3 to 5 years.

The grocery business is highly competitive and fragmented, and Kroger faces intense competition from big players, like Supervalu Inc. (NYSE:SVU), other conventional and specialty gourmet retailers with respect to price, store expansion, and promotional activities to drive traffic. This might dent the company’s sales and margins.

Higher debt-to-capitalization ratio also remains a matter of concern. Kroger ended second-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $7,347.4 million, reflecting a debt-to-capitalization ratio of 58.5%, which is substantially higher, and could adversely affect the company’s credit worthiness and make it more susceptible to the macroeconomic factors and competitive pressure.

Kroger, which currently operates 2,439 supermarkets and multi-department stores in 31 states under approximately 24 local banners, maintains a Zacks #3 Rank, which translates into a short-term “Hold” recommendation. Moreover, we have a long-term “Neutral” rating on the stock.