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Kroger Sets New High

WMT KR

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Shares of The Kroger Company (KR - Analyst Report) set a new 52-week high of $25.25 on Wednesday, October 17, 2012, beating its previous 52-week high of $24.84. The closing price of this food retail grocery chain as of October 17, 2012 was $25.01, which represented a return of 10% from its last reported quarter on September 7.

Growth Drivers

Kroger’s Customer 1st strategy, positive earnings surprises in the last four quarters with an average beat of 5.23% and strong outlook are the primary growth drivers for this stock.

Moreover, 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).

The Kroger Company posted better-than-expected fiscal second-quarter 2012 results, wherein the quarterly earnings of 51 cents a share surpassed the Zacks Consensus Estimate by a couple of cents, and rose 24.4% from 41 cents earned in the prior-year quarter. Total revenue (including fuel center sales) climbed 3.9% to $21,726.4 million from the prior-year quarter.

Healthy results prompted management to raise the outlook. Recently, Kroger enhanced 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 is focusing on bolstering return on invested capital through operating efficiencies and cost containment efforts to enhance profitability. The company will also 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, the company announced a new $500 million share repurchase program, overriding its existing program which had about $340 million remaining under the authorization.

Going ahead, the company 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 $2.41 for fiscal 2012. Kroger expects identical supermarket sales (excluding fuel) growth guidance of 3% to 3.5% for fiscal 2012.

Valuation

Valuation looks reasonable for Kroger, with shares trading at 10.4x 12-month forward P/E, compared with a peer group average of 10x. However, on a price-to-book basis, shares are currently trading at 3.6x, a substantial premium to the peer group average of 2.0x.

Nevertheless, the stock looks attractive given a trailing 12-month ROE of 28.7%, which is higher than the peer group average of 18%. The company’s long-term estimated earnings per share growth rate also remain healthy at 9.1%.

About the Company

Founded in 1883 and incorporated in 1902 with headquarters in Cincinnati, Ohio, The Kroger Company is one of the nation’s largest grocery retailers operating 2,425 supermarkets and multi-department stores in 31 states under approximately 24 local banners, Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry's, King Soopers, QFC, Ralphs and Smith's. In addition, Kroger directly, or through subsidiaries or franchisee and operating agreements, runs 788 convenience stores, 342 fine jewelry stores, 1,124 supermarket fuel centers, and 37 food-processing plants. The company has a market cap of $13.20 billion.

Our Recommendation

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.

 

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