The Kroger Company (KR), one of the largest grocery retailers, is scheduled to report its first-quarter 2010 results before the bell on Thursday. We believe that the company’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. In its last earnings call, Kroger hinted at a 2% – 3% growth at its identical supermarket sales in fiscal 2010, although down from an average growth of 4.1% achieved in the last three years, given the economic conditions.
However, the intensifying price war among grocery stores to lure price-focused consumers has compelled Kroger to cut prices, hurting its sales and margins. Consumers are trading down to cheaper substitute brands and shopping for groceries at low-price leaders such as, Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST). Retailers are reluctant to raise prices for the fear of losing traffic.
At this juncture an ambiguity still exists as to how Kroger will response to Wal-Mart’s aggressive promotional campaign of price rollbacks. The company in its earnings call is expected to intimate changes in food and fuel prices, consumer spending pattern, traffic, performance at discretionary categories, and market share that directly correlate with the company’s performance going forward.
Analysts surveyed by Zacks, expect Kroger to post first-quarter 2010 earnings of 55 cents a share. Of the 16 analysts covering the stock, only 1 analyst has raised its estimate in the last 30 days, which led to an increase of 1.9% in the Zacks Consensus Estimate of 55 cents. The current Zacks Consensus Estimate represents a year-over-year decline of 16.7%.
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. In its last earnings call, Kroger hinted at a 2% – 3% growth at its identical supermarket sales in fiscal 2010, although down from an average growth of 4.1% achieved in the last three years, given the economic conditions.
However, the intensifying price war among grocery stores to lure price-focused consumers has compelled Kroger to cut prices, hurting its sales and margins. Consumers are trading down to cheaper substitute brands and shopping for groceries at low-price leaders such as, Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST). Retailers are reluctant to raise prices for the fear of losing traffic.
At this juncture an ambiguity still exists as to how Kroger will response to Wal-Mart’s aggressive promotional campaign of price rollbacks. The company in its earnings call is expected to intimate changes in food and fuel prices, consumer spending pattern, traffic, performance at discretionary categories, and market share that directly correlate with the company’s performance going forward.
Analysts surveyed by Zacks, expect Kroger to post first-quarter 2010 earnings of 55 cents a share. Of the 16 analysts covering the stock, only 1 analyst has raised its estimate in the last 30 days, which led to an increase of 1.9% in the Zacks Consensus Estimate of 55 cents. The current Zacks Consensus Estimate represents a year-over-year decline of 16.7%.
With respect to earnings surprises, Kroger has performed across a wide range of earnings expectations over the last four quarters from a negative 25% to a positive 14.7%. The average remained negative at 3.8%. This suggests that Kroger has missed the Zacks Consensus Estimate by an average of 3.8% in the last four quarters.
Kroger’s shares are maintaining a Zacks Rank #4, which translates into a short-term ‘Sell’ recommendation as the threat from Wal-Mart may continue to weigh upon Kroger and lower investors’ confidence. However, our long-term recommendation for the stock remains ‘Neutral’.
Read the full analyst report on “KR”
Read the full analyst report on “WMT”
Read the full analyst report on “COST”
Zacks Investment Research
