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Kroger's (KR) Q3 Earnings Surpass Estimates, Increase Y/Y

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The Kroger Co. (KR - Free Report) reported third-quarter fiscal 2018 results, wherein both the top and the bottom lines surpassed the respective estimates for the third successive time. However, identical sales, without fuel, marginally fell short of analysts’ expectations. Moreover, gross margin continues to contract. Further, in spite of reporting better-than-expected results, management maintained its full-year adjusted earnings per share view.

Let’s Introspect

The company delivered adjusted earnings of 48 cents a share that beat the Zacks Consensus Estimate of 43 cents and increased 9.1% from the prior-year quarter. This Cincinnati, OH-based company continues to envision adjusted earnings in the range of $2.00-$2.15 per share. The current Zacks Consensus Estimate for fiscal 2018 stands at $2.11.

However, the company revised its GAAP net earnings view to $3.80-$3.95 per share from its previous range of $3.88-$4.03 owing to a market value adjustment of 9 cents a share for investment made in Ocado.

Total sales declined a marginal 0.3% to $27,672 million from the prior-year quarter but came ahead of the Zacks Consensus Estimate of $27,557 million. Excluding fuel, the convenience store business unit divestiture and the merger with Home Chef total sales jumped 1.7%. Digital sales surged more than 60% during the quarter under review.  The company’s identical sales, excluding fuel center sales, grew 1.6%.

We note that gross margin contracted 80 basis points to 21.6%, after shrinking 40 basis points in the preceding quarter. Meanwhile, excluding fuel and the LIFO charge, gross margin fell 91 basis points during the quarter under review, after declining 36 basis points in the second quarter. Management hinted that gross margin rate reflected price investments, higher transportation costs and growth of the specialty pharmacy business.

The Kroger Co. Price, Consensus and EPS Surprise

 

The Kroger Co. Price, Consensus and EPS Surprise | The Kroger Co. Quote

Kroger Ups the Retail Game

The grocery industry has been undergoing a fundamental change, with technology playing a major role and the focus shifting to online shopping. Kroger, which faces stiff competition from bellwethers such as Walmart (WMT - Free Report) and Amazon (AMZN - Free Report) , has taken stock of the situation and is in the process of giving itself a complete makeover. The company is expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. The company’s “Restock Kroger” program is also gaining traction.

Kroger launched a new apparel brand, Dip in more than 300 Fred Meyer and Kroger Marketplace stores. Moreover, Kroger Personal Finance witnessed record profit, while Kroger Precision Marketing revenue soared more than 150% year to date. Also, the company has entered into a partnership with Walgreens to explore new ways to reach consumers. The company will now sell around 2,300 products at 13 Walgreens locations via Kroger Express, a store-in-a-store concept. Moreover, Kroger also expanded its Home Chef Express meal kits in 65 Walgreens locations in the Chicago.

These endeavors have helped the shares of Kroger to advance 15% in the past six months compared with the industry’s growth of 13%.

Other Financial Aspects

Kroger ended the quarter with cash of $393 million, total debt of $15,018 million, and shareholders’ equity of $7,610 million. Total debt increased $171 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.72 compared with 2.57 in the year-ago period. In the trailing four quarters, the company bought back $2.3 billion of shares and paid $435 million in dividends.

Management continues to project capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be approximately $3 billion for fiscal 2018.

Bottom Line

We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

Kroger carries a Zacks Rank #3 (Hold). A favorably-ranked stock includes Costco (COST - Free Report) having a long-term earnings growth rate of 10.2% with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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