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Analyst Blog

We maintain our Neutral recommendation on The Kroger Company (KR - Analyst Report) with a target price of $35.00 following the company’s first-quarter fiscal 2013 results.

Why the Reiteration?

We believe that a dominant position among the nation’s largest grocery retailers enables Kroger to sustain its top-line growth, expand its store base, and boost market share. The company is also well positioned to deliver higher earnings primarily through strong super market sales (sans fuel) growth. This is well defined from the stock’s Zacks Rank #2 (Buy) and evident from its first-quarter results.

The quarterly earnings of 92 cents a share beat the Zacks Consensus Estimate of 88 cents, and surged from 78 cents earned in the prior-year quarter on the back of the Customer 1ststrategy. Healthy results prompted management to provide an upbeat outlook. Kroger now envisions fiscal 2013 earnings between $2.73 and $2.80, up from a range of $2.71 to $2.79 per share forecasted earlier. Total sales climbed 3.4% to $30,043 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $30,232 million.

Alongside, Kroger is actively managing its capital and returning much of its free cash to shareholders via share buybacks and dividends. Moreover, management continues to deploy capital to concentrate more on remodels, merchandising, and other viable projects.

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. The recent economic downturn has transformed the way consumers used to shop. Cash-strapped consumers are now prioritizing their purchases, choosing cheaper substitute brands and shopping for groceries at low-price leaders.

Further, higher debt-to-capitalization ratio remains a major concern. Kroger ended the first quarter with a total long-term debt of $7,946 million, reflecting a debt-to-capitalization ratio of 63.4%, which is higher, and could negatively affect the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.

Other Stocks Worth Considering

Other stocks worth considering in the food and miscellaneous diversified sector include Flowers Foods, Inc. (FLO - Snapshot Report), B&G Foods Inc. (BGS - Snapshot Report) and Omega Protein Corp. , all of which hold a Zacks Rank #1 (Strong Buy), and are expected to continue with their upbeat performance.

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