Investors swooned amid The Kroger Co.’s (KR, Financial) unveiling of first-quarter earnings, pushing up shares more than 9% in afternoon trading.
Shares of the nation’s largest supermarket chain by revenue began spiking in pre-market trading, seizing further momentum after its earnings call on Thursday morning. At market open, the stock popped to just under $30 a share. At one point, the stock rose to over 10%.
In the last year, Kroger shares have climbed 27%. The price-median chart by GuruFocus shows shares are trading below their historical value. The stock is trading at 13.62 times earnings and 12.77 times forward earnings. The price-earnings ratio for Kroger is 82% higher than its peers. The median is 18.85 times.
The Cincinnati-based grocer reported adjusted earnings of 73 cents per share on sales of $37.5 billion. Earnings exceeded analysts’ estimates by 10 cents. In total, first-quarter revenue increased 3.4% from the same period last year, when it reported $36.3 billion in revenue. Kroger reported adjusted net earnings for the first quarter of 2017 of 58 cents per share.
The company reported identical supermarket sales of 1.4%, excluding costs for fuel. Kroger’s identical sales were 1.9%, excluding fuel costs.
The supermarket chain that has competitors like Walmart Inc. (WMT, Financial) and Amazon.com Inc. (AMZN, Financial) also revamped its guidance to $2 to $2.15 per share from a previous forecast of $1.95 to $2.15.
One highlight of the earnings call on Thursday was an emotion-packed testimony by CEO Rodney McMullen. McMullen spoke of being first hired in 1978 in Kentucky as an evening stock clerk who rose through the ranks and became the company’s top executive.
“The nice thing about us, many of the people, over 70 percent of store managers started out as hourly associates,’’ McMullen said during the earnings call. “This is a great place to come for a job and make it a career.”
GuruFocus ranked the company's business predictability with a 5-star rating, the most coveted rating bestowed on the stocks of companies with average gains of 12% a year in stock value. The rating also reflects a company with consistent revenue and earnings growth.
GuruFocus ranks the company 6 out of 10 in financial strength and 7 of 10 in profitability and growth. The grocer’s debt load was reported at more than $12 billion this year, and has been growing substantially over the years. Another red flag was an annual decline of -6.3% in operating margin.
The company says it will use a part of its benefits from tax reform to get a grip on its debt load, as part of efforts that are underway over the next several years.
The company reports a dividend yield of 1.75%. That is higher than 58% of nearly 500 companies in the global grocery stores industry.
Guidance
For 2018, Kroger raised the low end of its net earnings guidance range to $3.64 to $3.79 per diluted share. The previous GAAP range was $3.59 to $3.79. The company raised the low end of its adjusted net earnings guidance range to $2.00 to $2.15 per diluted share for 2018, from $1.95 to $2.15 previously.
The company continues to expect capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be approximately $3 billion in 2018.
Kroger expects its 2018 tax rate to be approximately 22%.
Restock Kroger
The company’s revamp plan over the next several years began producing results in the first quarter, officials said.
For example, it saw digital sales of 66% in the first quarter. The grocer also reported the “highest-ever dollar share” in the history of its brands, such as its organic brand, Simple Truth.
Ocado
The big announcement in the first quarter had to do with the company’s unveiling of plans to partner up with online grocery supermarket Ocado (LSE:OCDO, Financial), which is headquartered in the United Kingdom. The announcement was made about a month ago.
Under the agreement, Kroger will have access to the Ocado Smart Platform, which includes online ordering, automated fulfillment and home delivery capabilities.
The company also announced it will use benefits from federal tax reform legistation that was passed late last year to support educational programs for employees, raise wages and to improve the company’s 401(k) plan.
