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Kroger (KR) Q3 Earnings & Sales Beat, View Intact, Stock Up


After witnessing a negative earnings surprise in the second quarter of fiscal 2017,The Kroger Co. KR made a sharp come back in the third quarter. The grocery retailer posted earnings of 44 cents a share that beat the Zacks Consensus Estimate of 40 cents and increased 7.3% from the prior-year quarter. As a result, shares are up nearly 10% during pre-market trading hours.

Nevertheless, management reiterated its fiscal 2017 adjusted earnings guidance of $2.00-$2.05 per share. The current Zacks Consensus Estimate for fiscal 2017 is pegged at $1.97.

Total sales grew 4.5% to $27,749 million from the prior-year quarter and also came ahead of the Zacks Consensus Estimate of $27,307 million, marking the fifth straight quarter of revenue beat. Excluding fuel center sales, total sales rose 3%. Digital revenue surged 109% on the back of ClickList.

Kroger has been trying all means to overcome stiff competition, which has intensified with the entrance of Amazon AMZN, volatility in food prices, an aggressive promotional environment and waning store traffic. A dominant position among the nation’s largest grocery retailers enables it to boost market share by expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative.

The company’s “Restock Kroger” program is reaping results. Kroger commenced “We Are Local” campaign; launched and opened a new restaurant concept, Kitchen 1883; and added two new product lines under “Our Brands”. The company is also passing the benefit of cost containment to customers by lowering prices and launched home delivery in select locations in Southern California in collaboration with Instacart.

Kroger Company (The) Price, Consensus and EPS Surprise

Kroger Company (The) Price, Consensus and EPS Surprise | Kroger Company (The) Quote

These endeavors have helped the shares of Kroger to surge 17.8% in a month compared with the industry that gained 11.7%. We believe that the company's operational strategies present enormous opportunities to augment identical supermarket sales and enhance return on invested capital.

The company’s identical supermarket sales (stores that are open without expansion or relocation for five full quarters), excluding fuel center sales, grew 1.1% to $21,629 million, while including fuel center sales, identical supermarket sales jumped 2.4% to $24,605 million. Kroger now envisions fourth quarter identical supermarket sales growth, excluding fuel, to surpass 1.1%.

Operating income increased 3.8% year over year to $740 million, whereas operating margin remained flat at 2.7%.

Other Financial Aspects

Kroger, which faces competition from Wal-Mart Stores, Inc. WMT, ended the quarter with cash of $334 million, total debt of $14,847 million, and shareholders’ equity of $6,211 million. Total debt increased $1,011 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.57 compared with 2.35 in the year-ago period. In the trailing four quarters, the company bought back $1.7 billion of shares and paid $446 million in dividends.

Management projects capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be approximately $3 billion for fiscal 2017.

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, which operates 2,790 retail food stores, holds a Zacks Rank #3 (Hold). Better-ranked stock includes Conagra Brands, Inc. CAG having a long-term earnings growth rate of 7% 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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