Kroger: 3rd Quarter Results Show A Bright Future

| About: Kroger Co. (KR)
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The company reported double-digit growth for both sales and earnings in its recent earnings results.

Furthermore, management provided a very positive outlook for the remainder of FY 2014.

Kroger continues to be a strong performer in the grocery retailer sector.

The Kroger Co. (NYSE:KR), one of the world's largest retailers and grocery store, reported outstanding third quarter results. Revenues rose 11.1% year-over-year to $25B, which is in-line with analyst estimates. In addition to double-digit top-line growth, adjusted net earnings per diluted share exceeded consensus estimates by $0.08, rising a whopping 30% year-over-year to $0.69 (vs. $0.53). The unadjusted results for the current quarter included a $0.04 due to certain tax items, bringing dilated EPS to $0.73. However, even before adjustments it is clear that this was a banner quarter for the company.

Furthermore, the company reported identical-supermarket sales, without fuel, rose 5.6% in the quarter, making this the 44th consecutive quarter of positive identical supermarket sales growth, excluding fuel. Digging further into the release, we do see that FIFO gross margin fell 2 bps to 21.24% in the current quarter. However, the company's FIFO operating margin increased 9 basis points on a rolling four quarters basis (excluding fuel and adjustment items), which fits with management's goal to expand FIFO operating margin on a rolling four quarters basis.

Although this was a strong quarter, investors are most interested in a company's future. In that regard, the key takeaway from the earnings release was the updated full-year guidance management provided for fiscal year 2014. The company raised FY14 EPS guidance to $3.32-$3.36, compared with prior guidance of $3.22-$3.28. Analysts were already expecting higher results, with consensus at $3.29, but this new guidance exceeds even that higher expectation.

The company did not provide detailed guidance for FY15, however, they did confirm Kroger's long-term diluted EPS growth guidance of 8%-11%, plus a growing dividend. Additionally, given the strong adjusted results of 2014, management does expect FY15 results to be closer to the low end of this guidance range.

Overall, the company posted impressive results as it executes well on its strategy. Investors will definitely want to keep a close eye on the company's debt levels, which have increased recently due to the Harris Teeter transaction and share repurchase activity. However, the acquisition seems to have been a smart play for the company, and the capital return policy has enabled shareholders to receive $1.8B through buybacks and dividends over the last four quarters alone. The company should be able to reduce its debt load and continue funding strategic initiatives through its growing cash flow from operations. This is definitely one grocery retailer to watch out for.

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