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Kroger's (KR) Q2 Earnings Beat Estimates, Digital Sales Surge

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The Kroger Co. (KR - Free Report) came up with second-quarter fiscal 2020 results, wherein both the top and the bottom lines not only beat the Zacks Consensus Estimate but also improved significantly from the prior-year period. Notably, this was the third straight quarter of positive earnings surprise. Impressively, this Cincinnati, OH-based company prioritized its actions to resonate well with the prevailing crisis and burgeoning demand for essential commodities. Notably, the company’s digital business remains a key growth driver.

This Zacks Rank #2 (Buy) company has been making prudent investments to bolster omni-channel operations, improve supply chain and increase manpower to ensure swift customer service amid such challenging times. We note that the stock has advanced 19.3% compared with the industry’s rally of 30.6% in the past six months.

Let’s Introspect

Kroger posted adjusted earnings of 73 cents a share that surpassed the Zacks Consensus Estimate of 51 cents and increased sharply from 44 cents reported in the prior-year quarter.

Total sales of $30,489 million came ahead of the Zacks Consensus Estimate of $30,058.4 million. The metric increased 8.2% year over year. Excluding fuel, top line improved 13.9% from the year-ago period. The company’s digital sales surged 127%, while identical sales, without fuel, grew 14.6% compared with 92% and 19%, respectively, reported in the preceding quarter.

We note that gross margin increased 90 basis points to 22.8%. FIFO gross margin, excluding fuel, expanded 5 basis points from the year-ago period driven by sourcing efficiencies, sales leverage and growth in alternative profit streams. Adjusted FIFO operating profit came in at $894 million, up from $626 million reported in the year-ago period.

The Kroger Co. Price, Consensus and EPS Surprise

The Kroger Co. Price, Consensus and EPS Surprise

The Kroger Co. price-consensus-eps-surprise-chart | The Kroger Co. Quote

Other Financial Aspects

Kroger ended the quarter with cash of $372 million, total debt of $13,482 million, and shareowners’ equity of $9,793 million. Net total debt decreased by $2,174 million over the last four quarters.

During the quarter under review, the company bought back shares worth $211 million under its $1 billion authorization announced on Nov 5, 2019. Notably, on Sep 11, the company’s board of directors authorized a $1 billion share repurchase program, overriding the prior authorization. The company expects to make share repurchases of $600-$1,000 million in fiscal 2020.

Management projects capital expenditures in the band of $3-$3.4 billion and expects to generate adjusted free cash flow between $2.5 billion and $2.7 billion in fiscal 2020.


Notably, Kroger updated its fiscal 2020 view following sturdy performance in the first half and on expectation of sustained food-at-home trend.

Management envisions fiscal 2020 earnings between $3.20 and $3.30 per share, which reflects an increase of 45-50% on a year-over-year basis. The Zacks Consensus Estimate for earnings for fiscal year currently stands at $2.87, which is likely to witness an upward revision in the coming days. For fiscal 2020, Kroger expects total identical sales, without fuel, to exceed 13% and anticipates adjusted FIFO operating profit in the band $3.9-$4 billion.

Wrapping Up

Kroger, which operates in the thin-margin grocery industry, has been making every effort to strengthen position not only with respect to products but also in terms of the way consumers prefer shopping grocery. The company has been focusing on plant-based products and eyeing technological expansion.

Notably, the company’s “Restock Kroger” program involving investments in omni-channel platform, identifying margin-rich alternative profit streams, merchandise optimization, and lowering of expenses has been gaining traction.

Other Stocks to Consider

Target (TGT - Free Report) has a long-term earnings growth rate of 7.2%. Currently, it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sprouts Farmers Market (SFM - Free Report) has a long-term earnings growth rate of 9.2% and carries a Zacks Rank #2 currently.

Ollies Bargain Outlet (OLLI - Free Report) has a long-term earnings growth rate of 21.6%. Currently, it carries a Zacks Rank #2.

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