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Kroger (KR) Beats on Q2 Earnings & Sales, Raises FY21 View

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The Kroger Co. (KR - Free Report) reported second-quarter fiscal 2021 results, wherein both the top and the bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. Management highlighted that identical sales results exceeded internal expectations. We note that the company’s digital business remains a key growth driver.

This Cincinnati, OH-based company has been making significant investments to enhance product freshness and quality, and expand digital capabilities. Impressively, Kroger has been introducing new items under its “Our Brands” portfolio — launched 142 new items during the quarter under review. It also collaborated with ghost kitchen partner Kitchen United to provide consumers on-demand meal pickup and delivery from popular restaurants.

Sturdy performance and sustained food at home trends prompted management to raise fiscal 2021 guidance.

Let’s Introspect

Kroger posted adjusted earnings of 80 cents a share that surpassed the Zacks Consensus Estimate of 63 cents and increased from 73 cents reported in the prior-year quarter.

Total sales of $31,682 million came ahead of the Zacks Consensus Estimate of $30,620 million. The metric also rose 3.9% year over year. Excluding fuel, sales dropped 0.4% from the year-ago period. We note that identical sales, without fuel, fell 0.6%.

On a two-year stack basis, digital sales surged 114%, while identical sales, without fuel, increased 14%.

We note that gross margin contracted 140 basis points to 21.4%. FIFO gross margin, excluding fuel, declined 60 basis points from the year-ago period. This decrease reflects continued price investments as well as higher shrink and supply chain costs, partly offset by sourcing benefits and growth in the alternative profit business. Adjusted FIFO operating profit came in at $947 million, up 5.9% from 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 $339 million, total debt of $14,155 million, and shareowners’ equity of $9,258 million. Net total debt increased by $1,235 million over the last four quarters. During the quarter, the company bought back $349 million shares and year-to-date, repurchased $751 million shares. At the end of the second quarter, $779 million remains available under the share repurchase authorization announced on Jun 17, 2021.

Management estimates capital expenditures in the band of $3.4-$3.6 billion and expects to generate free cash flow between $1.9 billion and $2.1 billion in fiscal 2021.

2021 View

Management now envisions identical sales, without fuel, to be down 1-1.5% in fiscal 2021. The company had previously expected a decline of 2.5-4% in the metric. The company anticipates FIFO operating profit in the band $3.9-$4 billion, up from prior projection of $3.5-$3.7 billion.

Management now anticipates fiscal 2021 earnings between $3.25 and $3.35 per share. The Zacks Consensus Estimate for earnings for the fiscal year currently stands at $3.09, which could witness an upward revision in the coming days. The company had earlier forecast earnings in the range of $2.95-$3.10 per share.

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. Realizing the need of the hour, the company has been offering a no-contact delivery option, low-contact pickup service and ship-to-home orders. Kroger launched sushi delivery pilot with DoorDash in three geographies. It expanded to 2,239 Pickup locations and 2,546 Delivery locations.

Shares of this Zacks Rank #2 (Buy) company have advanced 19.7% in the past three months compared with the industry’s rise of 5.4%.

Other Stocks to Consider

Darling Ingredients Inc. (DAR - Free Report) has a trailing four-quarter earnings surprise of 39.1%, on average. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Walmart (WMT - Free Report) has a trailing four-quarter earnings surprise of 14.3%, on average. The stock carries a Zacks Rank #2.

Costco (COST - Free Report) has a long-term earnings growth rate of 9.3% and a Zacks Rank #2 currently.