Kroger (KR, Financial) is a $38.45 billion market cap company and will announce its Q4 earnings on March 3. According to the below chart, since the beginning of the February 2011, Kroger has outperformed the supermarket sector and its peers. However, 2016 has not been a good year for Kroger so far. Kroger's stock price has come down 6% on year to date basis, which is somewhat in line with the S&P 500, which has declined around 4%.
The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the U.S. It also manufactures and processes some of the food for sale in its supermarkets.
Expectation from upcoming earnings report
Kroger has exhibited a strong growth in sales and earnings over the past several quarters. The company’s same store sales have been positive for the last 48 consecutive quarters, and management is expecting sales comp could lie somewhere around 4% to 4.5% in the fourth quarter. In the third quarter 2015, the company gave a surprise to investors by cutting the analyst expectations and displaying a positive surprise. The management is expecting diluted earnings per share of $2.02 to $2.04 as comparison to previous guidance of $1.92 to $1.98.
Catalysts:
- Kroger performance: In the last quarter, Kroger has missed the consensus estimate and reported a 0.4% year over year increase in sales to $25 billion, which includes the impact of weak oil prices. However, if we exclude fuel, company has reported a sale increase of 5.5% on a year over year basis.
- Same store sales: Kroger's same store sales continued to be high as Kroger reported its 12th consecutive year of positive supermarket sales growth. Kroger's same store comps were up 5.4% during the quarter as compared to negative same sales store trend of many of its peers. Kroger's corporate brand continued to be an important part representing 27.7% of total units and 26% of sales dollar.
- Earnings per share:Â In the last quarter, Kroger reported EPS of 43 cents, displaying a positive surprise factor of 10.25%. The company's operating margin was up by 18 basis points as compared to its same fiscal quarter of last year. Wall Street is expecting that in the coming fiscal quarter, Kroger will report EPS of 55 cents per share, rising 4% year over year. The market is expecting total revenue of fiscal year would be $110 billion.
- Shareholders' return:Â As we can see from the above image of Kroger’s price, investors have enjoyed high returns in the stock market, and the company has boosted total shareholders return by paying healthy dividend and repurchasing shares. Kroger returned $1.1 billion to shareholders through share buybacks and repurchasing shares. If we look at the below image we can see that company has delivered double-digit growth in dividends over the last five years. Its dividends grew by a compounded annual growth rate of 20.6% between fiscal 2009 to 2016. Kroger recently announced a quarterly dividend of 10.5 cents per share, in line with the previous quarters. This represents a 42 cent annualized dividend for the current fiscal year.
Wall Street expectation
The stock's consensus price target is $51 with a median target of $45. Among the 26 analysts who cover Kroger, 17 have assigned buy ratings, and nine have assigned hold ratings.
Valuation:
Relative valuation
Kroger has a P/E of 19.52, close to the industry median of 19.41, but the company is cheaper than its competitors such as Food Market, Sprouts Farmer Markets and Costco, which trade at higher multiples of 20x, 26x and 27x. The price-to-sales multiple is 0.35x, while the average price-to-sale multiple for supermarkets in the Retail Select Sector XRT ETF is 0.39x. Thus, Kroger is slightly cheaper than the industry.
With more than 400,000 shares in his portfolio, Ken Fisher (Trades, Portfolio) is still Kroger's leading guru shareholder. Others include Jeff Auxier (Trades, Portfolio) and Steven Cohen (Trades,Portfolio).
Note:
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While writing this article, I do not own any stock of this organisation, nor do I have any plans to invest in the above mentioned stock for the next 72 hours.
