A dominant position among the nation’s largest grocery retailers enables The Kroger Company (KR) to expand its store base and boost its market share by introducing new products. The company’s strong corporate and national brands have helped garner customers’ loyalty. The company’s Customer 1st strategy enriches shopping experience and convinces buyers to return to the store. We expect the company to sustain its earnings growth momentum with this strategy and its cost containment efforts.
Kroger posted two consecutive quarters of earnings beat in fiscal 2014. After a positive surprise of 3.8% in the first quarter, second-quarter earnings surpassed the Zacks Consensus Estimate by 1.5%. We believe that given the company’s strong identical store sales growth for about 43 successive quarters and better-than-expected bottom-line performance, Kroger is poised to achieve its long-term earnings per share growth rate target of 8% to 11%.
In the last concluded quarter, Kroger posted earnings of 70 cents a share that came a penny ahead of the Zacks Consensus Estimate, and surged 16.7% from 60 cents earned in the prior-year quarter. The better-than-expected results prompted management to raise its earnings guidance. Kroger now projects fiscal 2014 earnings between $3.22 and $3.28 per share, up from its earlier range of $3.19 to $3.27, and reflecting year-over-year growth of 13% to 15%.
We believe fiscal 2014 presents many opportunities to augment identical supermarket sales, alleviate gross margin pressure, improve operating margin and enhance return on invested capital. Management continues to deploy capital to concentrate more on remodels, merchandising, and other viable projects. Kroger also remains optimistic on its acquisition of Harris Teeter that is helping in expanding its reach in high-growth markets including Delaware, Florida, Maryland and Washington.
The economy is not devoid of risks, and Kroger is not immune to such adversities. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.
Moreover, a higher debt-to-capitalization ratio remains a major concern. Kroger ended second-quarter fiscal 2014 with a total debt of $11,200 million, reflecting a debt-to-capitalization ratio of approximately 69%, which is substantially higher, and could affect the company’s credit worthiness. This would also make it more susceptible to the macroeconomic factors and competitive pressure.
The pros and cons embedded in the stock is well reflected from its Zacks Rank #3 (Hold).
Favorably Ranked Stocks
Other favorably ranked stocks include The Hain Celestial Group, Inc. (HAIN), J&J Snack Foods Corp. (JJSF) and Treehouse Foods, Inc. (THS), all carrying a Zacks Rank #2 (Buy).
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