Kroger Earnings Preview

| About: Kroger Co. (KR)
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The Kroger Company (NYSE:KR), one of the largest grocery retailers and an S&P 500, is slated to report its fourth quarter and fiscal 2011 financial results before the market opens on Thursday, March 1, 2012.

The current Zacks Consensus Estimate for the quarter is 49 cents a share, which reflects a growth of 6.5% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 47 cents and a high of 52 cents a share. The Zacks Consensus estimates revenue at $21,415 million for the fourth quarter.

For fiscal 2011, the current Zacks Consensus Estimate is $2.00 per share. Further, the analysts polled by Zacks expect full-year revenue to be $90,403 million.

Recap of Third-Quarter 2011

Kroger’s quarterly earnings of 33 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 3.1% from 32 cents delivered in the prior-year quarter.

Total revenue (including fuel center sales) climbed 10.3% to $20,594.3 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,430 million.

Excluding fuel center sales, total revenue rose 5.1% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 5% to $15,524.9 million. Including fuel center sales, identical supermarket sales jumped 9.4% to $18,418.1 million.

Management Guided

At its last earnings call, Cincinnati-based Kroger raised its fiscal 2011 earnings guidance to a range of $1.95 and $2.00 per share, up from $1.85 to $1.95 forecasted earlier.

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

Zacks Agreement & Magnitude

Of the 17 analysts following the stock, one revised the estimate upward and another lowered the same in the last 30 days. In the last 7 days, none of the analysts revisited any estimate. The Zacks Consensus Estimate of 49 cents did not show any change in the last 7 and 30 days.

For fiscal 2011, one analyst revised the estimate upward and another lowered the same in the last 30 days. In the last 7 days, none of the analysts revised any estimate. The Zacks Consensus Estimate of $2.00 did not show any change in the last 7 and 30 days.

Mixed Earnings Surprise History

With respect to earnings surprises, Kroger has missed as well as topped the Zacks Consensus Estimates over the last four quarters in the range of negative 4.7% to positive 9.4%. The average remains at positive 3.9%. This suggests that Kroger has beaten the Zacks Consensus Estimate by an average of 3.9% in the trailing four quarters.

Let’s Conclude

A dominant position among the nation’s largest grocery retailers enables Kroger to sustain growth in the 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 30 to 40 major capital projects comprising opening of new stores, expansions and relocations, and 130 to 140 remodels. Management expects fiscal 2011 capital expenditure to be marginally above $1.9 billion.

Kroger 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) as well as 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.

Kroger ended third-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $7,689.8 million, reflecting a debt-to-capitalization ratio of 61%, 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.

Currently, we have a long-term ‘Neutral’ rating on the stock. Moreover, Kroger’s shares maintain a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and correlates with our long-term view.

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