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Kroger: Maintaining the Momentum

June 25, 2014 | About:
abirk

abirk

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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. The company has provided 42 consecutive quarters of positive identical supermarket sales growth.

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 25.11 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.

Looking Into the Numbers

On June 19, 2014, the nation's largest supermarket chain, and operator of Ralphs, Smith's, Food 4 Less and other branded chains, reported its first quarter of fiscal year 2014 with net earnings of $501 million, or $0.98 per diluted share. Customer 1st strategy and acquisition of Harris Teeter are the reasons behind the strong earnings.

Total sales (including fuel center sales) grew 9.9% to $32.96 billion in the first quarter compared to $30.00 billion for the same period last year. Kroger’s total sales excluding fuel increased 11.4% in the first quarter over the same period last year. Further, identical supermarket sales (stores that are open without expansion or relocation for five full quarters) excluding fuel center sales, increased 4.6% to $24.94 billion. Kroger recorded a $28 million LIFO charge during the first quarter compared to a $17 million LIFO charge in the same quarter last year. The company is increasing its LIFO estimate for the year to $90 million from its previous estimate of $55 million. The company’s FIFO gross margin was 21.01% of sales for the first quarter. Further, First quarter FIFO operating profit, excluding fuel and pension agreements, increased approximately $124 million over the prior year.

Kroger ended the quarter with cash of $265 million, total debt of $11.31 billion, and shareholders’ equity of $4.77 billion. Net debt increased $3.37 billion from the prior-year period due to Harris Teeter transaction and share buyback activity. Total capital expenditures during the quarter were $709 million.

Positive Outlook

Kroger raised and narrowed its adjusted net earnings guidance to a range of $3.19 to $3.27 per diluted share for fiscal 2014. This guidance was based on the first quarter results, and the original guidance was $3.14 to $3.25 per diluted share. Its long-term net earnings per diluted share growth rate guidance is 8 – 11%, plus a growing dividend. Further, Kroger raised its identical supermarket sales growth guidance, excluding fuel, to 3.0% to 4.0% for fiscal 2014 (original guidance was 2.5% to 3.5%). Kroger also expects capital investments excluding mergers, acquisitions and purchases of leased facilities, to be in the $2.8 to $3.0 billion range for the year, including Harris Teeter.

Growth

Kroger’s customer-centric business model provides a strong value proposition to consumers. The company is well positioned to continue its growth momentum primarily through identical supermarket sales growth. Kroger's customer loyalty program has been a success since it offers discounts to customers on the basis of their previous shopping patterns. 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.

As the supermarket industry continues to consolidate, Kroger reviews potential merger/acquisition candidates and carefully analyzes their potential to enhance shareholder value. Kroger’s merger/acquisition strategy focuses primarily on existing markets. Such “in-market” mergers/acquisitions have lower risk and generally produce a higher incremental return because they require little investment in overhead, advertising, and distribution. Further, a chart has been provided below to show details of Kroger’s merger/acquisition.

Chart 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 quarter, Kroger bought back 25.7 million shares for an aggregate amount of $1.1 billion. The company’s healthy free cash flow generating ability has facilitated it to return over $1.9 billion to stakeholders via dividends and share repurchases in the last four quarters.

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.


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