Earnings Preview: Kroger

The Kroger Company ( KR - Analyst Report ) , one of the largest grocery retailers and an S&P 500 company, is slated to report its third-quarter 2012 financial results on Thursday, November 29, 2012.

The current Zacks Consensus Estimate for the quarter is pegged at 43 cents a share, which reflects a growth of 30.3% from the prior-year quarter’s earnings. The current Zacks Consensus estimates range between a low of 41 cents and a high of 48 cents a share. The Zacks Consensus estimates third-quarter revenue to come in at $21,671 million.

Recap of Second-Quarter 2012

Kroger’s 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.

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. Including fuel center sales, identical supermarket sales jumped 3.6% to $19,443.1 million.

Management Guided

During its last earnings call, Cincinnati-based Kroger raised its fiscal 2012 earnings outlook. Management now expects fiscal 2012 earnings between $2.35 and $2.42 per share, up from a range of $2.33 to $2.40 forecasted earlier.

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.

Zacks Agreement & Magnitude

The Zacks Consensus Estimate did not show any movement in the last 7 and 30 days, as the downward revisions made by 1 of 18 analysts covering the stock in the said time frame did not have a material impact. None of the analysts raised their estimates.

Positive Earnings Surprise History

With respect to earnings surprises, Kroger has topped the Zacks Consensus Estimates over the last four quarters in the range of 2% to 8.3%. The average remained at 5.2%, suggesting that Kroger has outpaced the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Let’s Conclude

A dominant position among the nation’s largest grocery retailers enables Kroger to sustain growth in the top line, expand its store base and boost its market share. The company’s strong corporate and national brands help win customer loyalty.

The company’s customer-centric business model provides a strong value proposition to consumers, and positions it well to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel).

Management continues to deploy capital to concentrate more on remodels, merchandising, and other viable projects. These include nearly 40 to 50 major capital projects comprising opening of new stores, expansions and relocations, and 125 to 140 remodels. Management continues to expect fiscal 2012 capital expenditures to be in the range of $1.9 billion to $2.2 billion.

The grocery business is highly competitive and fragmented, and Kroger faces intense competition from big players, like Supervalu Inc. ( SVU - Analyst Report ) as well as other conventional and specialty gourmet retailers with respect to price, store expansion, and promotional activities to drive traffic. This might dent the company’s sales and margins.

Kroger ended second-quarter 2012 with a long-term debt (including obligations under capital leases and financial obligations) of $8,126.6 million, reflecting a debt-to-capitalization ratio of 68.2%, which is substantially higher, and could adversely affect the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Kroger’s shares maintain a Zacks #3 Rank that translates into a short-term Hold rating.