Kroger Beats, Ups Outlook

The Kroger Company ( KR - Analyst Report ) , one of the largest grocery retailers, recently posted better-than-expected second-quarter 2012 results on the back of Customer 1^st strategy and effective cost management.

The quarterly earnings of 51 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 24.4% from 41 cents earned in the prior-year quarter. Share repurchase activities provided cushion to the bottom line. The prior-year quarter earnings exclude tax benefit adjustments.

Healthy results prompted management to raise the outlook. The Cincinnati-based Kroger now envisions fiscal 2012 earnings between $2.35 and $2.42 per share, up from a range of $2.33 to $2.40 forecasted earlier. Management expects to attain higher end of the guidance range.

The current Zacks Consensus Estimate for fiscal 2012 is $2.38 per share that dovetails with management earnings outlook.

Total revenue (including fuel center sales) climbed 3.9% to $21,726.4 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $21,983 million.

Excluding fuel center sales, total revenue rose 3.8% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) grew 3.6% to $16,268.8 million, marking the 35th successive quarter of increase.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. ( WMT - Analyst Report ) and Whole Foods Market Inc. ( WFM - Analyst Report ) , reiterated its identical supermarket sales (excluding fuel) growth guidance of 3% to 3.5% for fiscal 2012. Management expects to accomplish upper end of the forecasted range.

Including fuel center sales, identical supermarket sales jumped 3.6% to $19,443.1 million. We believe that Kroger’s dominant position enables it to sustain top-line growth, expand store base and boost market share.

Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

However, Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.

Kroger ended the quarter with cash of $234.9 million, temporary cash investments of $3.4 million, and total debt of $8,126.6 million, reflecting a debt-to-capitalization ratio of 68.2%, and shareholders’ equity of $3,793.2 million.

Net debt increased $1,236.9 million from the prior-year period. Trailing-twelve months’ net total debt to adjusted EBITDA ratio was 1.96 compared with 1.71 in the prior-year period.

Capital investment, exclusive of acquisitions and purchases of leased facilities, aggregated $444.7 million for the quarter.

During the quarter, Kroger bought back 23.7 million shares for an aggregate amount of $525 million. 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 trailing four quarters.

The company currently operates 2,425 supermarkets and multi-department stores in 31 states under approximately 24 local banners. Currently, we have a long-term Neutral recommendation on the stock.

However, Kroger’s shares maintain a Zacks #2 Rank that translates into a short-term Buy rating, and well defines the company’s healthy results and upbeat guidance.