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Kroger Beats, Ups Outlook

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The Kroger Company (KR - Free Report) , one of the largest grocery retailers, recently posted better-than-expected third-quarter 2012 results on the back of its "Customer 1st" strategy and effective cost management.          

The quarterly earnings of 46 cents a share beat the Zacks Consensus Estimate of 43 cents, and surged 39.4% from 33 cents earned in the prior-year quarter. Share repurchase activities provided cushion to the bottom line. However, including a gain of 14 cents a share, earnings came in at 60 cents for the quarter.

Healthy results prompted management to raise the outlook. The Cincinnati-based Kroger now envisions fiscal 2012 earnings between $2.44 and $2.46 per share, up from a range of $2.35 to $2.42 forecasted earlier. The current Zacks Consensus Estimate for fiscal 2012 is $2.41 per share that lies below the company’s guidance range.

Total revenue (including fuel center sales) climbed 5.9% to $21,807 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $21,664 million.

Excluding fuel center sales, total revenue rose 3.7% and identical supermarket sales (stores that are open without expansion or relocation for five full quarters) grew 3.2% to $16,056.8 million, marking the 36th successive quarter of increase.

Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT - Free Report) and Whole Foods Market Inc. , now expects identical supermarket sales (excluding fuel) growth of 3% to 3.5% during the fourth quarter.

Including fuel center sales, identical supermarket sales jumped 5.2% to $19,456.9 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 the quarter with cash of $269.1 million, temporary cash investments of $165.9 million, and total debt of $8,859.6 million, reflecting a debt-to-capitalization ratio of 70.2%, and shareholders’ equity of $3,762.7 million. Net debt increased $1,012.1 million from the prior-year period.

Trailing twelve months’ net total debt to adjusted EBITDA ratio was 2.08 compared with 1.89 in the prior-year period. Return on invested capital for the quarter was 13.3% compared with 13.5% during the prior-year period.

Capital expenditures, exclusive of acquisitions and purchases of leased facilities, aggregated $473.5 million for the quarter.

During the quarter, Kroger bought back 14.5 million shares for an aggregate amount of $333 million. The company’s healthy free cash flow generating ability has facilitated it to return over $1.7 billion to stakeholders via dividends and share repurchases in the trailing four quarters.

The company currently operates 2,422 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.

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