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Kroger's (KR) Q3 Earnings Beat, Digital Sales Surge, View Up

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The Kroger Co. (KR - Free Report) came up with third-quarter fiscal 2020 results, wherein both the top and the bottom line improved from the prior-year period. Notably, this was the fourth straight quarter of an earnings beat. This Cincinnati, OH-based company has prioritized its actions to resonate well with the prevailing coronavirus crisis and burgeoning demand for essential commodities. We note that the company’s digital business remains a key growth driver. Encouragingly, management raised fiscal 2020 outlook.

Despite the aforementioned tailwinds, shares of this Zacks Rank #3 (Hold) company were down in pre-market trading hours on Dec 3. We note that the company’s top line fell short of analysts’ expectations, hurting investor sentiments.

Let’s Introspect

Kroger posted adjusted earnings of 71 cents a share that surpassed the Zacks Consensus Estimate of 66 cents and increased sharply from 47 cents reported in the prior-year quarter.

Total sales of $29,723 million missed the Zacks Consensus Estimate of $29,978.2 million. Nonetheless, the metric increased 6.3% year over year. Excluding fuel and dispositions, sales improved 11.3% from the year-ago period. The company’s digital sales surged 108%, while identical sales, without fuel, grew 10.9%.

FIFO gross margin, excluding fuel, decreased 2 basis points from the year-ago period. This was due to price investments and mix changes, offset by sourcing efficiencies, sales leverage and growth in alternative profit streams. Adjusted FIFO operating profit came in at $871 million, up from $653 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 $367 million, total debt of $13,520 million, and shareowners’ equity of $10,044 million. Net total debt decreased by $124 million over the last four quarters.

During the quarter under review, the company bought back shares worth $304 million under its $1-billion authorization announced on Sep 11, 2020. The company expects to make share repurchases of $1.1-$1.3 billion in fiscal 2020.

Management now envisions capital expenditures in the band of $2.8-$3.2 billion and expects to generate adjusted free cash flow between $2.8 billion and $3.1 billion in fiscal 2020.

Guidance

Markedly, Kroger updated its fiscal 2020 view following sustained sturdy performance and on expectation of sustained food-at-home trend.

Management now anticipates fiscal 2020 earnings between $3.30 and $3.35 per share, which reflects an increase of 50-53% on a year-over-year basis. The Zacks Consensus Estimate for earnings for the fiscal year currently stands at $3.28, which is likely to witness an upward revision in the coming days. The company had earlier projected earnings in the range of $3.20-$3.30 per share.

For fiscal 2020, Kroger expects total identical sales, without fuel, to be around 14% and anticipates adjusted FIFO operating profit in the band of $4-$4.1 billion. The company had earlier projected total identical sales, without fuel, to exceed 13% and adjusted FIFO operating profit between $3.9 billion and $4 billion.

Wrapping Up

Kroger, which operates in the thin-margin grocery industry, has been making every effort to strengthen its position not only with respect to products but also in terms of the way consumers prefer shopping. 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.

The stock has advanced 11.4% so far in the year compared with the industry’s rally of 24.8%.

Other Stocks to Consider

Grocery Outlet Holding (GO - Free Report) has a long-term earnings growth rate of 14.7%. Currently, it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Target (TGT - Free Report) has a long-term earnings growth rate of 8.5%. Currently, it carries a Zacks Rank #2 (Buy).

The TJX Companies (TJX - Free Report) has a long-term earnings growth rate of 10.5% and carries a Zacks Rank #2 currently.

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