Kroger Enhances Growth Target

The Kroger Company (KR - Analyst Report) recently upped its long term earnings per share growth target to 8% to 11% (excluding its current dividend of 2.5%) from its earlier target of 6% to 8%.

The company will largely focus on increasing return on invested capital and will bring in operating efficiencies through cost containment to enhance profitability. In order to support its growth strategy, the company will boost its capital spending by an incremental $200 million annually to concentrate more on store expansions into existing and newer markets and other viable projects.

Moreover, to provide cushion to its earnings, the company announced a new $500 million share repurchase program, overriding its existing program which had about $340 million remaining under the authorization.

Kroger’s management is actively handling its capital, returning much of its free cash to shareholders via share buybacks and dividends. Kroger recently raised its quarterly dividend by 30%, bringing the annualized payout to 60 cents a share from the earlier level of 46 cents. This marks the sixth consecutive annual increase in Kroger’s quarterly dividend since it reinstated dividend payment in the year 2006.

During the recently concluded 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.

Going ahead, the company stood by its earlier guidance and envisions fiscal 2012 earnings between $2.35 and $2.42 per share. Management expects to attain the higher end of the guidance range. The Zacks Consensus Estimate stands at $2.40 for fiscal 2012.

Kroger also reiterated its identical supermarket sales (excluding fuel) growth guidance of 3% to 3.5% for fiscal 2012.

We believe Kroger’s customer-centric business model provides a strong value proposition to consumers, and is well positioned to deliver higher earnings primarily through strong identical supermarket sales growth (sans fuel). Moreover, the company’s Customer 1st strategy is benefiting the company.

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

However, due to the current macroeconomic environment and intense price competition from Wal-Mart Stores Inc. (WMT - Analyst Report), we maintain a long-term ‘Neutral’ recommendation on the stock.