The Kroger Company (KR), one of the largest grocery retailers in the U.S., recently posted first-quarter 2010 results that topped Zacks expectations, sending shares up 3.75% by mid-day Thursday.
The quarterly earnings of 58 cents a share surpassed the Zacks Consensus Estimate of 54 cents. However, the earnings dropped 12.1% from 66 cents delivered in the prior-year quarter.
Despite an 8.7% increase in total revenue to $24,764.1 million (including fuel center sales), earnings tumbled on account of an increase in merchandise costs (up 11%), operating, general and administrative expense (up 4.2%) and depreciation and amortization (up 5.4%), partially offset by a fall in interest expense (down 19%).
The Cincinnati-based Kroger reaffirmed its fiscal year 2010 earnings guidance range of $1.60 to $1.80 per share that dovetails with the current Zacks Consensus Estimate $1.73.
Excluding fuel center sales, total revenue climbed 3.1%; comparable supermarket sales jumped 2.7% to $20,376 million, whereas identical supermarket sales (stores that are open without expansion or relocation for five full quarters) rose 2.4% to $19,781.8 million.
Kroger, which faces stiff competition from Wal-Mart Stores Inc. (WMT), Safeway Inc (SWY) and Whole Foods Market Inc. (WFMI), now expects identical supermarket sales (sans fuel) growth of 2% to 3% for fiscal year 2010, although down from an average growth of 4.1% achieved in the last three years, given the economic conditions.
Including fuel center sales, comparable supermarket sales climbed 7.1% to $22,990.4 million, whereas identical supermarket sales rose 6.8% to $22,318.7 million. We believe that Kroger’s dominant position enables it to sustain top-line growth, expand its 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, the intensifying price war among grocery stores to lure price-focused consumers has compelled Kroger to cut prices, hurting its sales and margins. Retailers are reluctant to raise prices for the fear of losing traffic. At this juncture, Kroger’s response to Wal-Mart’s aggressive promotional campaign of price rollbacks lacks clarity.
Kroger ended the quarter with cash and cash equivalents of $1,276 million, and long-term debt of $7,525.5 million, reflecting a debt-to-capitalization ratio of 60%. Trailing-twelve months’ net total debt to EBITDA ratio was 1.91, up from 1.77 in the same period last year.
During the quarter, Kroger bought back 3.6 million shares at an average price of $21.89 per share aggregating $79.5 million. Since the end of the quarter under review, the company had repurchased an additional 1.9 million shares at a price of $20.25 per share. The company still has $240 million at its disposal under the $1 billion share repurchase program announced in January 2008.
Kroger currently operates 2,470 supermarkets and multi-department stores in 31 states under approximately 24 local banners.
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