The Kroger Company (KR), one of the largest grocery retailers, recently posted second-quarter fiscal 2013 earnings of 60 cents a share that came in line with the Zacks Consensus Estimate, and surged from 51 cents earned in the prior-year quarter buoyed by Customer 1st strategy. Share repurchase activities also provided cushion to the bottom line.
The Cincinnati-based company, Kroger, reiterated its fiscal 2013 earnings of $2.73 to $2.80 per share. The current Zacks Consensus Estimate dovetails with the company’s high-end of the guidance range.
Total sales (including fuel center sales) climbed 4.6% to $22,722 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $22,730 million.
Excluding fuel center sales, total sales rose 3.9% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) grew 3.3% to $16,846 million, marking the 39th successive quarter of increase.
Kroger now projects identical supermarket sales (excluding fuel) growth of 3% to 3.5% for fiscal 2013, up from previous forecast of 2.5% to 3.5%.
Including fuel center sales, identical supermarket sales jumped 4% to $20,287 million. We believe that Kroger’s dominant position enables it to sustain top-line growth, expand store base, and boost market share.
Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.
However, Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.
Operating income increased 11.2% year-over-year to $595 million due to top-line growth, whereas operating margin expanded 10 basis points to 2.6%.
Kroger ended the quarter with cash of $226 million, total debt of $7,892 million, reflecting a debt-to-capitalization ratio of approximately 62%, and shareholders’ equity of $4,848 million. Net debt declined $446 million from the prior-year period.
Trailing-twelve months’ net total debt to adjusted EBITDA ratio was 1.77 compared with 1.96 in the prior-year period. Return on invested capital on a 52-week, rolling four quarters basis was 13.5%, up 10 basis points from the prior-year period.
Total capital expenditures during the quarter aggregated $507 million. Management maintained its capital investments projection of $2.1 billion to $2.4 billion for fiscal 2013.
During the quarter, Kroger bought back 2.4 million shares for an aggregate amount of $90 million. The company’s healthy free cash flow generating ability has facilitated it to return over $920 million to stakeholders via dividends and share repurchases in the last four quarters.
The company currently operates 2,418 supermarkets and multi-department stores in 31 states under approximately 24 local banners. We believe that the company’s strong corporate and national brands helped it gain customer loyalty.
Currently, Kroger’s shares maintain a Zacks Rank #2 (Buy), and well reflects the company’s earnings momentum. Other stocks worth considering in the retail sector include Citi Trends, Inc. (CTRN), Fortune Brands Home & Security, Inc. (FBHS) and Lumber Liquidators Holdings, Inc. (LL), all sporting a Zacks Rank #1 (Strong Buy). All these companies are expected to continue with their upbeat performances.
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