A dominant position among the nation’s largest grocery retailers enables The Kroger Company (KR) to sustain growth in its top line, expand its store base and boost its market share. The company’s strong corporate and national brands have 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). Identical supermarket sales are expected to grow 3.5% to 4.5% in fiscal 2011, up from 3% to 4% forecast earlier. The company aims to achieve annual earnings per share growth of 6% to 8% over a period of 3 to 5 years.
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 2011 capital expenditure between $1.7 billion and $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 shareholder returns 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. (SVU), as well as from other conventional and specialty gourmet retailers with respect to price, store expansion and promotional activities to drive traffic. These might dent the company’s sales and margins. Moreover, sluggish economic recovery and rising food and fuel prices may affect shopping patterns.
Higher debt-to-capitalization ratio also remains a matter of concern. Kroger ended first-quarter 2011 with a long-term debt (including obligations under capital leases and financial obligations) of $7,380.2 million, reflecting debt-to-capitalization ratio of 58.6%, which is substantially higher and could adversely affect the company’s credit worthiness, making it more susceptible to macroeconomic factors and competitive pressures.
Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Whole Foods Market Inc. (WFM), operates approximately 2,449 supermarkets and multi-department stores in 31 states under approximately 24 local banners. Kroger’s shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. Moreover, we have a long-term Neutral rating on the stock.
KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis Report
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