Kroger (KR) Meets Q4 Earnings, Beats Sales, Guides FY18

After delivering positive earnings surprise in the third quarter of fiscal 2017, The Kroger Co. (NYSE:KR) reported in line earnings in the fourth quarter. The grocery retailer posted adjusted earnings of 63 cents a share that came in line with the Zacks Consensus Estimate and increased 18.9% from the prior-year quarter.

Adjusted earnings for fiscal 2017 came in at $2.04 per share, down 3.8% from the year-ago period. Management now envisions fiscal 2018 earnings in the band of $1.95-$2.15 per share. The current Zacks Consensus Estimate for fiscal 2018 is pegged at $2.11.

Shares are down roughly 7% during pre-market trading hours.

Total sales grew 12.4% to $31,031 million from the prior-year quarter and also came ahead of the Zacks Consensus Estimate of $30,830 million, marking the sixth straight quarter of revenue beat. Excluding fuel center sales and the 53rd week, total sales rose 2.7%. Total sales rose 6.4% to $122.7 billion during the fiscal year, wherein digital sales surged more than 90%.

Kroger has been trying all means to overcome stiff competition from bellwethers such as Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) . The company remains well on track 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 gaining traction.

Kroger also entered into an agreement to sell its convenience stores to focus on its core operations. Per the deal valued $2.15 billion, Kroger will sell more than 700 stores — operating under the banners of Turkey Hill, Loaf 'N Jug, Kwik Shop, Tom Thumb and Quik Stop — to EG Group, a Blackburn, England-based operator of convenience stores in Europe. No wonder, Kroger plans to utilize net sale proceeds to buy back shares and lower the debt load.

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 22.9% in the past six months compared with the industry that gained 11.3%. 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 1.5% to $24,681 million, while including fuel center sales, identical supermarket sales jumped 2.7% to $27,833 million. Kroger now projects fiscal 2018 identical supermarket sales growth, excluding fuel, to be in the range of 1.5%-2%.

Other Financial Aspects

Kroger ended the quarter with cash of $339 million, total debt of $15,589 million, and shareholders’ equity of $6,905 million. Total debt increased $1,512 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.65 compared with 2.31 in the year-ago period. In the trailing four quarters, the company bought back $1.6 billion of shares and paid $444 million in dividends.

Management projects capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be approximately $3 billion for fiscal 2018. Capital investments totaled $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 carry a Zacks Rank #2 (Buy). Another top-ranked stock includes Post Holdings (NYSE:POST) having a long-term earnings growth rate of 14% 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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