Kroger Is A Buy

| About: Kroger Co. (KR)
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Summary

Kroger’s two recent acquisitions of Harris Teeter and Vitacost.com helped it to penetrate into the online retail market and strengthen its operations in an integrated fashion.

The online grocery market is expected to grow at a rate of 9.5% per annum to reach an estimated value of $9.4 billion by 2017.

Kroger plans to cut back on its share repurchase program and invest the money in paying off its debt in order to strengthen its balance sheet by the end of FY2015.

With 99% of its operations focused on retail, Kroger Co. (NYSE:KR) beat the analysts' expectations during the third quarter of FY2014. Kroger Co. has been performing exceptionally well lately with regards to both its revenues and earnings. Besides the continual growth in the top and bottom lines, the company is beating its rivals in terms of market share as well. Following the company's very strong recent performances its stock price has risen 55% since the start of the year.

Recent Performance

During the most recently ended quarter, Kroger beat both the top and bottom line estimates. The company's top line rose approximately 11% YoY to $25 billion compared to analysts' expectations of $24.83 billion. The bottom line swiftly increased to $362 million marking a rise of 21% YoY. In per share terms, the company's earnings were enhanced by its repurchase program and increased 28% YoY from $0.57 per share in the same period last year to $0.73 in the recently ended quarter. However, adjusted EPS increased 30% YoY from $0.53 in the third quarter of the last fiscal year to $0.69 in the MOST RECENTLY ENDED quarter. The following table details the company's recently reported top line and adjusted EPS in comparison to analysts' expectations.

Source: Wall Street Journal; Earnings Release

The company's comparable sales for the quarter were 5.6% compared to Wal-Mart's (NYSE:WMT) comparable sales growth of 3.5%.

Industry and Future Outlook

The company has managed to expand its revenues and profits in a slow-growing market. The company has made smart moves to grow in an operating environment where its rivals slowed down. Kroger's two recent acquisitions of Harris Teeter and Vitacost.com helped it to penetrate into the online retail market and strengthen its operations in an integrated fashion. In fact, the two acquisitions could be the cardinal factors in the company's growing market share.

The acquisitions give Kroger an edge by allowing it to offer added convenience to its consumer base through online ordering and home delivery. Note that online retail is gaining popularity among consumers in the wake of dual-working families and busier lifestyles. The online grocery market is expected to grow at a rate of 9.5% per annum to reach an estimated value of $9.4 billion by 2017.

With these acquisitions and overall top line growth, the company has made an upward revision in its full year earnings estimate. Kroger raised its EPS estimate from its previously estimated value of $3.22-$3.28 to fall within a range of $3.32 and $3.36. For now, the only unpleasant thing about the company is its overly inflated debt level. The company's debt to equity ratio presently stands at 224.15 against the industry average of 76.62. Kroger plans to cut back on its share repurchase program and invest the money in paying off its debt in order to strengthen its balance sheet by the end of FY2015. With an increasing revenue base, increasing efficiencies, and growing operations, it can be safely assumed that Kroger's debt level will be closer to the debt level standard set by the industry.

Investor Returns

The company slashed its diluted average share count by approximately 6% YoY as per the recently ended quarter. To reiterate, the share reduction program may be put on hold as the company struggles to strengthen its balance sheet by bring down its debt level to market-accepted standards. However, the shareholders should continue to expect returns in the form of cash dividends. Although the company's dividend yield of 1.21% is lower than the market average of 1.80%, Kroger's five-year dividend growth exceeds the market's rate of dividend growth. Over the past five years, the company's cash dividends grew by 11.3% while the market's dividend growth rate stands at approximately 9%.

Besides distributing returns among the shareholders in the form of share repurchases and cash dividends, the company has reported a strong market performance as well, especially since 2013. The company's per share price has risen by more than 130% during the past two years. The following chart indicates the company's total returns in comparison with the S&P 500 index and its closest competitors.

Source: YCharts

Conclusion

Kroger's recent performance indicates strong strategic planning at the backend. Its recent acquisitions are in direct correlation with the market while its efforts to lower debt levels will further strength its balance sheet. The company is a long-term buy!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.