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Kroger’s (KR) Q2 Earnings Top Estimates, Digital Sales Soar

Zacks

The Kroger Co. KR reported second-quarter fiscal 2019 results, wherein both the top and the bottom lines improved year over year. Although total sales came below the Zacks Consensus Estimate, earnings per share surpassed the same for the second successive quarter. Management reiterated the forecast for fiscal 2019.

Let’s Introspect

The company delivered adjusted earnings of 44 cents a share that came ahead of the Zacks Consensus Estimate of 41 cents and increased 7.3% from 41 cents reported in the prior-year quarter. This Cincinnati, OH-based company continues to envision fiscal 2019 net earnings in the band of $2.15-$2.25 per share, which indicates an improvement over adjusted earnings of $2.11 per share reported in fiscal 2018.

Total sales of $28,168 million came below the Zacks Consensus Estimate of $28,398 million but increased marginally by 0.5% from the prior-year quarter. Excluding fuel, dispositions and merger transactions, top line improved 2.5% from the year-ago period. The company’s digital sales surged 31%, while identical sales, excluding fuel, grew 2.2%.Management reaffirms identical sales growth forecast of 2-2.25% in fiscal 2019.


We note that gross margin increased 30 basis points to 21.9%, after expanding 20 basis points in the preceding quarter. FIFO gross margin, excluding fuel, shrunk 29 basis points from the year-ago period, mainly due to industry-wide lower gross margin rates in pharmacy. Adjusted FIFO operating profit rose 10.6% to $626 million. Kroger anticipates adjusted operating profit in the band of $2.9-$3 billion.

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

Strategic Endeavors

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 and Amazon AMZN, 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. Management informed that “Our Brands” sales grew 3.1%. The company also introduced 203 new Our Brands items. Pickup or Delivery reached 95% of Kroger households (expanded to 1,780 Pickup locations and 2,225 Delivery locations). Management is also targeting “margin-rich alternative profit streams” which are likely to contribute an estimated incremental $100 million in operating profit this fiscal year versus the prior.

Other Financial Aspects

Kroger ended the quarter with cash of $354 million, total debt of $13,483 million, and shareholders’ equity of $8,653 million. Total debt decreased $1,049 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.46 compared with 2.59 in the year-ago period but down from 2.83 at the end of fiscal 2018. Management project capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be in the range of $3-$3.2 billion in fiscal 2019.

Bottom Line

We believe that Kroger’s customer-centric business model provides a strong value proposition. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

Kroger carries a Zacks Rank #4 (Sell). A favorably-ranked stock includes Ingles Markets, Incorporated IMKTA having a long-term earnings growth rate of 14.5% with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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