Earnings Preview: Kroger - Analyst Blog

The Kroger Company (KR), one of the largest grocery retailers and an S&P 500 company, is slated to report its first-quarter 2012 financial results on Thursday, June 14, 2012.

The current Zacks Consensus Estimate for the quarter is pegged at 72 cents a share, which reflects a growth of 2.9% from the prior-year quarter’s earnings. The current Zacks Consensus estimates range between a low of 71 cents and a high of 75 cents a share. The Zacks Consensus estimates first-quarter revenue to come in at $29,201 million.

Recap of Fourth-Quarter 2011

Kroger’s quarterly earnings of 50 cents a share inched past the Zacks Consensus Estimate by a penny, and rose 8.7% from 46 cents earned in the prior-year quarter.

Total revenue (including fuel center sales) climbed 7.7% year-on-year to $21,405.8 million, but it fell short of the Zacks Consensus Estimate of $21,415 million.

Excluding fuel center sales, total revenue rose 5% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 4.9% to $16,525.3 million. Including fuel center sales, identical supermarket sales jumped 7.1% to $19,264.7 million.

Management Guided

During its last earnings call, Cincinnati-based Kroger forecasted fiscal 2012 earnings between $2.28 and $2.38 per share.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Whole Foods Market Inc. (WFM), also predicted identical supermarket sales (excluding fuel) growth of 3% to 3.5% for fiscal 2012, including the anticipated adverse impact from prescription drugs coming off patent.

Zacks Agreement & Magnitude

With 1 out of the 19 analysts covering the stock downwardly revising the estimate for the first quarter, the Zacks Consensus Estimate dropped by a penny in the last 30 days. In the last 7 days, one analyst lowered the estimate, but that did not have any impact on the Estimate. Over the last 7 and 30 days, none of the analysts revised their estimates upward.

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 3.3%. This suggests that Kroger has outperformed the Zacks Consensus Estimate by an average of 3.3% in the trailing four quarters.

In the second quarter of fiscal 2011, the earnings missed the Zacks Consensus Estimate by 4.7%, whereas in the fourth, third and first quarters it beat the Estimate by 2%, 6.5% and 9.4%, respectively.

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 win customers’ loyalty.

The company’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 40 to 50 major capital projects comprising opening of new stores, expansions and relocations, and 125 to 140 remodels. Management expects fiscal 2012 capital expenditures in the range of $1.9 billion to $2.2 billion.

The grocery business is highly competitive and fragmented, and Kroger faces intense competition from big players, like Supervalu Inc. (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 fourth-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $8,164.1 million, reflecting a debt-to-capitalization ratio of 67.3%, which is substantially higher, and could adversely affect the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.

Currently, we have a long-term ‘Outperform’ recommendation on the stock. However, Kroger’s shares maintain a Zacks #4 Rank that translates into a short-term ‘Sell’ rating.