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After delivering positive earnings surprises in the first and second quarters of fiscal 2016, The Kroger Company (KR - Free Report) succumbed to a negative earnings surprise of 2.4% in the third quarter. The grocery retailer posted quarterly earnings of 41 cents a share that missed the Zacks Consensus Estimate by a penny and declined 4.7% from 43 cents earned in the prior-year quarter. Given the deflationary environment, the Cincinnati-based company narrowed its fiscal 2016 earnings projection and provided a bleak outlook for fiscal 2017.
Management now expects adjusted earnings in the band of $2.10 to $2.15 per share compared with previous range of $2.10 to $2.20. Kroger now projects fiscal 2017 earnings per share growth to be below the low end of its long term growth rate target of 8% to 11%. The current Zacks Consensus Estimate for fiscal 2016 and 2017 stand at $2.15 and $2.29, respectively. Shares are down nearly 3.4% during pre-market trading hours.
Total sales (including fuel center sales and Roundy's Inc.) grew 5.9% to $26,557 million from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $26,246 million, after missing the same in the past six consecutive quarters. Management stated that excluding fuel center sales, total sales rose 7.1%, while excluding Roundy's, total sales without fuel rose 1.6% in the quarter.
The company’s identical supermarket sales (stores that are open without expansion or relocation for five full quarters), excluding fuel center sales, grew marginally by 0.1% to $20,960 million, whereas including fuel center sales, identical supermarket sales edged down 0.2% to $23,526 million. For the final quarter, management anticipates identical supermarket sales (excluding fuel) growth to be slightly positive.
Operating income declined 7.6% year over year to $713 million, whereas operating margin contracted 40 basis points to 2.7%.
Kroger, which shares space with Whole Foods Market, Inc. , ended the quarter with cash of $362 million, total debt of $13,836 million, and shareholders’ equity of $6,630 million. Total debt increased $2,577 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.35 compared with 1.99 in the year-ago period.
Management projects capital expenditures – excluding mergers, acquisitions and purchases of leased facilities – for fiscal 2016 to be in the range of $3.6 to $3.9 billion.
Bottom Line
We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. The company is now providing ClickList and ExpressLane online ordering services in over 550 locations. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.
Hormel Foods delivered an average positive earnings surprise of 6.3% over the trailing four quarters and has a long-term earnings growth rate of 9.6%.
Target delivered an average positive earnings surprise of 9.9% over the trailing four quarters and has a long-term earnings growth rate of 8%.
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Kroger (KR) Q3 Earnings Misses, Sales Beat; Narrows View
After delivering positive earnings surprises in the first and second quarters of fiscal 2016, The Kroger Company (KR - Free Report) succumbed to a negative earnings surprise of 2.4% in the third quarter. The grocery retailer posted quarterly earnings of 41 cents a share that missed the Zacks Consensus Estimate by a penny and declined 4.7% from 43 cents earned in the prior-year quarter. Given the deflationary environment, the Cincinnati-based company narrowed its fiscal 2016 earnings projection and provided a bleak outlook for fiscal 2017.
Management now expects adjusted earnings in the band of $2.10 to $2.15 per share compared with previous range of $2.10 to $2.20. Kroger now projects fiscal 2017 earnings per share growth to be below the low end of its long term growth rate target of 8% to 11%. The current Zacks Consensus Estimate for fiscal 2016 and 2017 stand at $2.15 and $2.29, respectively. Shares are down nearly 3.4% during pre-market trading hours.
Total sales (including fuel center sales and Roundy's Inc.) grew 5.9% to $26,557 million from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $26,246 million, after missing the same in the past six consecutive quarters. Management stated that excluding fuel center sales, total sales rose 7.1%, while excluding Roundy's, total sales without fuel rose 1.6% in the quarter.
The company’s identical supermarket sales (stores that are open without expansion or relocation for five full quarters), excluding fuel center sales, grew marginally by 0.1% to $20,960 million, whereas including fuel center sales, identical supermarket sales edged down 0.2% to $23,526 million. For the final quarter, management anticipates identical supermarket sales (excluding fuel) growth to be slightly positive.
Operating income declined 7.6% year over year to $713 million, whereas operating margin contracted 40 basis points to 2.7%.
KROGER CO Price, Consensus and EPS Surprise
KROGER CO Price, Consensus and EPS Surprise | KROGER CO Quote
Other Financial Aspects
Kroger, which shares space with Whole Foods Market, Inc. , ended the quarter with cash of $362 million, total debt of $13,836 million, and shareholders’ equity of $6,630 million. Total debt increased $2,577 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.35 compared with 1.99 in the year-ago period.
Management projects capital expenditures – excluding mergers, acquisitions and purchases of leased facilities – for fiscal 2016 to be in the range of $3.6 to $3.9 billion.
Bottom Line
We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. The company is now providing ClickList and ExpressLane online ordering services in over 550 locations. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.
Kroger, which operates 2,796 retail food stores, maintain a Zacks Rank #3 (Hold). Better ranked stocks include Hormel Foods Corporation (HRL - Free Report) and Target Corporation (TGT - Free Report) both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Hormel Foods delivered an average positive earnings surprise of 6.3% over the trailing four quarters and has a long-term earnings growth rate of 9.6%.
Target delivered an average positive earnings surprise of 9.9% over the trailing four quarters and has a long-term earnings growth rate of 8%.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>