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What’s So Good About This Retailer?
Posted by: abirk (IP Logged)
Date: March 9, 2014 12:32PM

At the end of the day investors always want a good return for their hard earned money. Investors always look for higher earnings growth, higher shareholder returns, and sustainable strategy for growth in a company. The Kroger Co. (KR) neatly fits into the above criteria with its proven track record of results. It has provided 39 consecutive quarters of positive identical sales growth, which is shown in the chart below.

About this Retailer

Founded in 1883, Kroger, together with its subsidiaries, operates as a retailer in the United States. The company also manufactures and processes food for sale in its supermarkets. With a market cap of 22.72 billion, this Cincinnati, Ohio, based company is the seventh largest grocery retailer in the world and, along with Wal-Mart Stores, Inc. (WMT) and Costco Wholesale Corporation (COST), one of only three U.S. companies in the top ten. Extending well beyond its retail grocer core business, Kroger operates under nearly two dozen banners including: Kroger Real Estate, The Little Clinic, I-Wireless, Kroger Convenience Stores, Littman Jewelers, Fred Meyer Jewelers, Kroger Manufacturing, Kroger Pharmacies, and the recently-acquired Harris Teeter Supermarkets, Inc. (HTSI) (merger transaction between the two companies was completed on January 28, 2014). About half of the Kroger's supermarkets include gas stations. Further, partnering with Ecotality, Inc. (ECTYQ), Kroger has introduced electric car charging stations.

Looking Into the Numbers

On March 6, 2014, this grocery retailer reported fourth quarter 2013 earnings of $421.9 million, or $0.81 per diluted share and identical supermarket sales growth, without fuel, of 4.3% in the fourth quarter. The company reported fiscal 2013 net earnings of $2.90 per diluted share and identical supermarket sales growth, without fuel, of 3.6%. In the fourth quarter, which ended February 1, 2014, Kroger reported total sales of $23.2 billion. After adjusting for the extra week in the fourth quarter last year, total sales increased by 4.8%. Management stated that excluding fuel center sales and the extra week in the year-ago period, total sales rose 4.4%. Identical supermarket sales (stores that are open without expansion or relocation for five full quarters) excluding fuel center sales, grew 4.3% to $17,971 million. Including fuel center sales, identical supermarket sales jumped 4% to $21,039 million.

The company recorded a $9.7 million LIFO charge during the quarter compared to a $41.2 million LIFO credit in the same quarter last year. Kroger ended the quarter with cash of $260 million, total debt of $11,309 million, reflecting a debt-to-capitalization ratio of approximately 68%, and shareholders’ equity of $5,395 million. Net debt increased $2,265 million from the prior-year period due to Harris Teeter transaction. Capital investments, excluding mergers, acquisitions and purchases of leased facilities, totaled $2.3 billion for the year, compared to $2.0 billion in 2012. Kroger reported a return on invested capital, excluding the Harris Teeter transaction, on a 52-week, rolling four quarters basis, of 13.43%, compared to 13.42% during the same period last year. Trailing-twelve months’ net total debt to adjusted EBITDA ratio for the company was 2.43 compared with 2.04 in the prior-year period.

Kroger said its ability to keep its supermarkets open and well-stocked as customers rushed to hoard groceries ahead of winter storms helped boost its results in the fourth quarter.

Positive Outlook

Kroger expects full-year net earnings for fiscal 2014 to range from $3.14 to $3.25 per diluted share (including Harris Teeter). Growing fiscal 2013 adjusted earnings per diluted share of $2.85 by the company's long term growth rate of 8 – 11% equates to a range of $3.08 to $3.16 per diluted share. The company expects to return to its long-term growth rate of 8 – 11%. Shareholder return will be further enhanced by a dividend expected to increase over time.

For fiscal 2014, this retail giant expects its identical supermarket sales growth, excluding fuel, of approximately 2.5% to 3.5%. During fiscal 2014, Kroger plans to use cash flow from operations to maintain its current investment grade debt rating, repurchase shares, have a growing dividend, and fund capital investments. Management anticipates capital investments between $2.8 and $3 billion for fiscal 2014.

On Feb. 27, 2014, Kroger has announced that its total active workforce has grown by more than 7,000 during fiscal year 2013. Approximately 90 percent of the new jobs are in the company's supermarket divisions. Further, to strengthen its position in this competitive market, Kroger has promoted Dennis Gibson to the president of the QFC division. The company expects that Dennis's experience in both merchandising and retail operations make him a great fit to lead the QFC team.

Lee lacocca, an American businessman has said three rules and they are “Satisfy the customer, satisfy the customer, and satisfy the customer”. Kroger’s main motto is also to satisfy the valued customers.

Kroger's customer loyalty program has been a success since it offers discounts to customers on the basis of their previous shopping patterns. Therefore, on Feb. 11, 2014, the company has announced the acquisition of assets of leading digital coupons and promotions company, YOU Technology Brand Services, Inc. YOU Tech's retailer-centric, cloud-based platform bridges the gap between online engagement and in-store purchases, creating a measurable way for many of the world's largest retailers and brands to drive consumer purchase decisions online, in-store, and on-the-go.

To retain customers, Kroger has several pricing strategies which focus on three areas such as everyday prices, weekly specials, and store brands. The company is also price competitive for everyday items important to price sensitive shoppers.

The company also focuses on associate engagement for greater sales and profit growth, higher productivity, greater customer loyalty, and higher shareholder value. Kroger’s engagement drivers include customer focus, leadership, associate communications, and recognition.

Further, to strengthen its foothold, recently, Kroger approached Safeway Inc. (SWY), the second-largest grocery store chain in the U.S., about acquiring some of that company’s operations.

Kroger’s competitive advantage has been provided below in the chart.

Charts from company website

To Wrap Things Up

Kroger's strong financial position allowed the company to return more than $928 million to shareholders through share buybacks and dividends in 2013. During the fiscal year, Kroger repurchased 16.1 million common shares for a total investment of $609 million. The company’s dominant position enables it to expand store base and boost market share. Further, 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.

From the earnings report, it can be seen that Kroger is performing well, and has outperformed other players over the last year. The company has strong research and development team followed by sound technology infrastructure. This retail giant has strong fundamentals and strong growth projections along with its defensive nature and dividend yield. I am therefore pretty bullish that Kroger won’t let its valued customers as well as investors down in the near future.



Stocks Discussed: KR, WMT, COST, HTSI, ECTYQ, SWY,
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