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Kroger Beats by a Penny

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The Kroger Company (KR - Free Report) , one of the largest grocery retailers, recently posted fourth-quarter 2011 results. The quarterly earnings of 50 cents a share beat the Zacks Consensus Estimate by a penny, and rose 8.7% from 46 cents earned in the prior-year quarter. The increase in the bottom-line came ahead of Kroger’s long-term goal of 6% to 8% growth.

On a reported basis, including United Food and Commercial Workers pension plan consolidation, the company incurred a quarterly loss of 54 cents compared with an earnings of 44 cents in the year-ago quarter.

The Cincinnati-based Kroger, now expects fiscal 2012 earnings between $2.28 and $2.38 per share.

The current Zacks Consensus Estimate for fiscal 2012 is $2.22 per share. Consequently, following an upbeat guidance, we could witness a correction in the Zacks Consensus Estimates in the coming days, with analysts revising their estimates to better align with company’s earnings outlook.  

Total revenue (including fuel center sales) climbed 7.7% to $21,405.8 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $21,415 million.

Excluding fuel center sales, total revenue rose 5% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) climbed 4.9% to $16,525.3 million.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT - Free Report) and Whole Foods Market Inc. , now predicted identical supermarket sales (excluding fuel) growth of 3% to 3.5% for fiscal 2012, including the anticipated adverse impact from prescription drugs coming off patent.

Including fuel center sales, identical supermarket sales jumped 7.1% to $19,264.7 million. We believe that Kroger’s dominant position enables it to sustain top-line growth, expand store base, and boost market share.

Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

However, Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.

Kroger ended fiscal 2011 with cash of $181.2 million, temporary cash investments of $6.3 million, and total debt of $8,164.1 million, reflecting a debt-to-capitalization ratio of 67.3%, and shareholders’ equity of $3,966.8 million. Net debt increased $902.9 million from the prior-year. Trailing-twelve months’ net total debt to EBITDA ratio was 2.00 compared with 1.89 in the same period last year.

Capital investment, exclusive of acquisitions and purchases of leased facilities, aggregated $1898.5 million for fiscal 2011. Management projects capital expenditures between $1.9 billion and $2.2 billion.

During the quarter, Kroger bought back 11.7 million shares for an aggregate amount of $272.4 million. The company’s healthy free cash flow generating ability has facilitated it to return over $1.8 billion to shareholders via dividends and share repurchases. Management hinted that the company would sustain its shareholder friendly activities in fiscal 2012 with the long-term goal of enhancing shareholder return by approximately 8% to 10%.

The company currently operates 2,435 supermarkets and multi-department stores in 31 states under approximately 24 local banners. 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 and correlates with our long-term view.

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