Kroger Beats Earnings Forecast for 11th Straight Quarter

Retailer’s sales grew 4.0% to $26.6 billion in Q2 FY16

k1The Kroger Co. (NYSE: KR), the second-largest food retailer in the U.S. after Wal-Mart Stores Inc. (NYSE: WMT) announced its financial results for Q2 FY16 on September 9th, 2016.

The Cincinnati, Ohio-based Company operates stores that comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise and fuel. It operates under brands such as Kroger, Ralphs, Fred Meyer, King Soopers as well as the Simple Truth and Simple Truth Organic brands.

As of July 31st, 2016, Kroger operated 2,778 supermarkets, 784 convenience stores, and 323 fine jewelry stores in 35 U.S. states and an online retail store. Read more about Kroger’s financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Kroger’s total sales grew 4.0% to $26.6 billion compared to $25.5 billion in the year-ago period. Total sales, excluding fuel, rose 7.3% Y-o-Y during the reporting quarter, while total sales, excluding fuel and Roundy’s, grew 2.9% compared to the same period last year. The Company’s top-line growth has been under constant pressure from continued weakness in fuel prices and fuel price volatility.

Kroger, which also operates under the Food 4 Less, Fry’s, Smith’s, and Dillons brands, reported that identical store sales, excluding fuel centers, stood at 1.7%. It is worth noting that the Company achieved the 51st consecutive quarter of positive identical supermarket sales growth, excluding fuel. During Q2 FY16, Kroger’s comps were negatively impacted by deflation, which affected most of its product categories. Kroger faced a deflation of 1.5% in the grocery category alone in Q2 FY16.

k2During Q2 FY16, Kroger’s gross margin slipped to 22.1% of sales. Excluding fuel, Roundy’s and the LIFO (last in first out) charge, gross margin fell 13 basis points from the same period last year. Kroger recorded a $12 million LIFO charge during Q2 FY16, compared to a $21 million LIFO charge in the year-ago period.

Total operating expenses, excluding fuel, Roundy’s and pension agreements, decreased 6 basis points as a percentage of sales compared to the prior year. FIFO (first in first out) operating margin on a rolling four quarters basis, excluding fuel, Roundy’s, pension agreements, the 2015 and 2014 contributions to the UFCW Consolidated Pension Plan and the 2014 contributions to The Kroger Co. Foundation, decreased 3 basis points compared to the prior year.

In all, Kroger’s Q2 FY16 net earnings came in at $383 million, or $0.40 per diluted share. The company’s diluted EPS included charges related to the restructuring of certain multi-employer pension obligations. Excluding the effect of these charges, Kroger’s adjusted net earnings grew to $454 million, or $0.47 per diluted share, which rose 6.8%, compared to $433 million, or $0.44 per diluted share, in the year-ago period.

Other highlights: At the end of Q2 FY16, Kroger operated 2,240 pharmacies, 785 convenience stores, 323 fine jewelry stores, 1,423 supermarket fuel centers and 38 food production plants in the U.S. Kroger now offers ClickList and ExpressLane online ordering services in almost 400 locations.

Financial strategy

Kroger, as part of its long-term plans to drive growth while also giving back to shareholders, has maintained its current investment grade debt rating. This allows the Company to use free cash flow to pursue strategic opportunities, repurchase shares, and fund dividends.

Over the past year, Kroger has used free cash to repurchase $1.1 billion in common shares, pay $406 million in dividends, invest $3.8 billion in capital, and merge with Roundy’s Inc. for $866 million. Kroger’s net total debt to adjusted EBITDA ratio increased to 2.11, compared to 2.02 during the same period last year.

Guidance for full year FY16 and beyond

For the full year FY16, Kroger lowered its earnings guidance as a result of continued deflation, and now expects diluted EPS to range between $2.03 per share and $2.13 per share. Kroger’s adjusted diluted EPS is forecasted at $2.10 per share to $2.20 per share, which excludes the $0.07 per share charge from the company’s commitment to restructure certain multi-employer pension obligations. The previous guidance range was $2.19 per share to $2.28 per share, which excludes the $0.07 per share charge from the company’s commitment to restructure certain multi-employer pension obligations.

Kroger predicts identical supermarket sales growth, excluding fuel, to be in the 0.5% to 1.5% range, which is 1.4% to 1.8% for the full year FY16. The company also lowered expected capital investments, excluding mergers, acquisitions and purchases of leased facilities, to $3.6 billion to $3.9 billion for the year. The previous expectation was $4.1 billion to $4.4 billion.

Over the long-term, Kroger expects to achieve net earnings per diluted share growth rate guidance of 8% to 11%, plus a growing dividend.

Stock Performance

k3Kroger’s stock ended the day at $30.95, up 0.19%, at the close on Tuesday, September 13th, 2016, having vacillated between an intraday high of $31.16 and a low of $30.45 during the session. The stock’s trading volume was at 14,349,014 for the day. The Company’s market cap was at $29.18 billion as of Tuesday’s close.

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