The Kroger Company (KR) holds a dominant position among the nation’s largest grocery retailers. We recently upgraded our recommendation on Kroger to Outperform with a price target of $27.00 following the company’s healthy fourth quarter 2011 results. Earlier, we had a Neutral rating on the stock.
Drivers of Growth
Kroger’s strong corporate and national brands help in gaining customers’ loyalty, sustain growth in top line, expand its store base and boost its market share.
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). Identical supermarket sales are expected to grow between 3% and 3.5% during fiscal 2012.
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.
Efforts Reaping Results
Kroger’s fourth-quarter 2011 earnings of 50 cents a share beat the Zacks Consensus Estimate by a penny, and rose 8.7% from 46 cents earned in the prior-year quarter. The increase in the bottom line came ahead of Kroger’s long-term goal of 6% to 8% growth.
The Cincinnati-based Kroger now expects fiscal 2012 earnings between $2.28 and $2.38 per share. The current Zacks Consensus Estimate for fiscal 2012 is $2.33, supported by 16 analysts covering the stock.
Total revenue (including fuel center sales) climbed 7.7% to $21,405.8 million from the prior-year quarter, but 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.
Rewarding Shareholders
Kroger’s management is actively managing its capital and returning much of its free cash to shareholders through share repurchases and dividends. In September 2011, the company raised its quarterly dividend by 9.5% to 11.5 cents and announced a $1 billion share buyback program. This was the fifth time the company hiked its dividend since the inception of program in 2006.
During the fourth quarter of 2011, Kroger bought back 11.7 million shares for an aggregate amount of $272.4 million. The company’s healthy free cash flow generating ability facilitated it to return over $1.8 billion to shareholders via dividends and share repurchases in fiscal 2011. Management hinted that the company would sustain its shareholder friendly moves in fiscal 2012 with the long-term goal of enhancing shareholder return by approximately 8% to 10%.
Wrapping Up
The above analysis supports our unbiased view on the stock, and therefore we advocate our long-term Outperform recommendation on Kroger, which operates 2,435 supermarkets and multi-department stores in 31 states under approximately 24 local banners and faces stiff competition from Wal-Mart Stores Inc. (WMT) and Whole Foods Market Inc. (WFM).
The company’s shares hold a Zacks #1 Rank that translates into a short-term ‘Strong Buy’ rating, and well defines the company’s earnings growth potential, customer loyalty program, cost containment efforts, and increase in identical supermarket sales as well as share repurchase activity, providing cushion to the bottom line.
KROGER CO (KR): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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