Kroger Beats Q1 Earnings Expectations

Achieves 50th consecutive quarter of positive identical supermarket sales growth, excluding fuel

Source: Company's Website
Source: Company’s Website

The 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 Q1 FY16 on June 16th, 2016. Founded in 1883 and headquartered in Cincinnati, Ohio, Kroger’s stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise including apparel, home goods, and toys. 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 January 30th, 2016, the company operated 2,778 retail food stores, including 1,387 fuel centers; 784 convenience stores; and 323 fine jewelry stores and an online retail store, as well as franchised 78 convenience stores. Read more about the financial performance of Kroger below.

Q1 FY16 financial highlights

Kroger’s total sales for Q1 FY16 grew 4.7% to $34.60 billion from $33.05 billion in the year-ago quarter, but missed analysts’ consensus revenue estimate of $34.88 billion. Total sales, excluding fuel, grew 7.8%. Total sales, excluding fuel and Roundy’s, rose 3.5% during the quarter under review, as compared to the year-ago period. Kroger’s now offers ClickList and ExpressLane online ordering services in 25 markets.

Kroger, which also operates the Food 4 Less, Fry’s, Smith’s, and Dillons brands, said identical supermarket sales, including fuel centers, increased 0.4% and excluding fuel centers, it grew 2.4%. It is worth noting that the Company achieved a 50th consecutive quarter of positive identical supermarket sales growth, excluding fuel. FIFO gross margin was 23% of sales for Q1 FY16. Excluding fuel and Roundy’s, FIFO gross margin decreased 2 basis points from the comparable quarter last year.

Kroger recorded a $15 million LIFO charge during Q1 FY16, compared to $28 million LIFO charges in the year-ago quarter. Total operating expenses, excluding fuel and Roundy’s, declined 4 basis points as a percentage of sales during Q1 FY16.

FIFO operating margin on a rolling four quarters basis, excluding fuel, Roundy’s, the 2015 and 2014 contributions to the UFCW Consolidated Pension Plan, and the 2014 contributions to The Kroger Co. Foundation, increased 5 basis points during Q1 FY16.

Driven by higher sales and operating margins, Kroger reported an almost 10% increase in profit for Q1 FY16 at $680 million, or $0.70 per share, up from $619 million, or $0.62 per share, in the prior-year quarter.

Financial strategy

Source: Company's Website
Source: Company’s Website

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 $397 million in dividends, invest $3.6 billion in capital, and merge with Roundy’s Inc. for $866 million. Kroger’s strong EBITDA performance resulted in a return on invested capital, excluding Roundy’s, of 14.08% for Q1 FY16, compared to 14.03% for Q1 FY15.

Guidance

For the full year FY16, Kroger affirmed its earnings guidance in a range of $2.19 to $2.28 per share. The Company forecasts identical supermarket sales growth, excluding fuel, of 2.5% to 3.5% for FY16. Based on the current fuel margin trends, the Company believes its earnings will be at the low-end to mid-point of this range. Kroger expects net earnings to come in at $2.19 to $2.28 per diluted share for FY16. The Company expects capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be in the $4.1 billion to $4.4 billion range for FY16.

Challenges ahead

U.S. retailers in general faced a tough Q1 FY16, and the grocery sector as a whole has struggled given the tepid retail environment and thrifty consumer spending. Kroger has delivered robust growth for years, and is seen to be a bright spot in the otherwise sluggish grocery sector. However, the weak jobs data in May 2016 and a continued economic slowdown could hurt Kroger’s bottom line for the rest of FY16. Kroger’s is also facing headwinds from a deflation in food prices, particularly in meat, that has dented the grocery industry at large.

That apart, Kroger has joined a host of U.S. brick-and-mortar retailers in fending off intense competition from online merchants like Amazon.com Inc. (NASDAQ: AMZN) and fast-expanding dollar store chains. However, the Company focuses on affordable apparel rather than fashion labels make it less dependent on apparel than other department stores such as Macy’s Inc. (NYSE: M), and Target Corp. (NYSE: TGT).

Stock Performance

K3Kroger’s stock stood at $35.47 at the close on Thursday, June 16th, 2016, having reached an intraday high of $36.98 and a low of $35.35 during the session. The stock’s trading volume was at 19,025,275 for the day. The Company’s market cap was at $33.62 billion as of Thursday’s close.

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