Against Tough Odds, Kroger (KR) Outpaces its Rivals

Kroger (KR: Charts, News), the largest American supermarket chain, beat Wall Street estimates with strong fourth quarter results that came in higher than rivals Safeway (SWY: Charts, News) and Supervalu (SVU: Charts, News). In addition to Kroger's namesake stores, the company also owns Ralphs, Fred Meyer, Smith's, Food 4 Less among other local brands.

Kroger currently employs 338,000 people in 2,439 locations across 31 states. The company also operates 788 convenience stores, 361 jewelry stores, 1,046 fuel centers and 40 food processing plants in the United States, many of them purchased through local acquisitions.

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The Cincinnati-based grocer posted a loss of 54 cents per share, or $306.9 million, which included a large one-time charge from merging four pension funds into one. Kroger was required to contribute $650 million to the fund as part of the agreement. 65,000 employees are currently paid through this program, an amount which Kroger hopes to reduce in the future.

Excluding its hefty pension charge, Kroger actually earned 50 cents per share, a 14% increase over the previous year that beat analysts' estimates by a penny. Revenue rose 7.7% to $21.4 billion, aided by fuel sales from its affiliated gas stations.

Excluding fuel sales, identical-supermarket (same store) sales rose 4.9%, a slight dip from the 5% it reported in the previous quarter. Safeway and Supervalu posted 1.5% and 2.9% gains respectively on the same basis. Supermarkets with gas stations, such as Kroger, Safeway, Wal-Mart and Costco have been able to attract more customers with lower fuel costs for members, which helps offset lower sales volume in its stores.

Despite lingering doubts regarding the future of Kroger's supermarkets in the face of stiff competition from superstores Wal-Mart (WMT: Charts, News) and Costco (COST: Charts, News), the company managed to hold its own despite rising food and fuel costs denting margins. Kroger's surprising resilience has been attributed to its loyalty program, which rewards frequent shoppers with discounts. CEO David Dillon noted this in a news release, stating, "Our Customer 1st' strategy is delivering value for our customers, who are rewarding Kroger with their loyalty. Customer loyalty, in turn, is driving sales and shareholder returns."

Kroger stated that it remains committed to its time tested business strategy of focusing on low prices and loyalty programs, which it admits is a "balancing act" of controlling operating and administrative costs. The company also heavily promotes its house brands, which are cheaper than other brands, to reduce expenses. Kroger cuts costs in areas of the business that don't directly affect the customer in order to lower prices of certain items, usually through its loyalty program or special coupons. Some analysts remain concerned that Kroger's balancing act will be increasingly hard to sustain in 2012, as rising food costs driven by a growing global population and inflation will keep pressure on its margins. During the fourth quarter, merchandising costs rose 9.1%. Rising credit and debit card fees also threaten to increase costs as Americans grow increasingly reliant on using plastic both at the check-out counter and at the pump.

For the full year, Kroger expects full-year earnings between $2.28 to $2.38 per share, in line with analyst estimates. Shares trade at 10.8 times forward earnings with a 5-year PEG ratio of 1.1, both technical signals that the stock is undervalued. However, the stock is trading near its 52-week high of $25.85, and has been locked in a tight range between $21.14 and $25.85 for a year. Kroger also pays a quarterly dividend of 12 cents per share, a 1.9% yield. Kroger has stated that it remains committed to maximizing shareholder value through continued share buybacks throughout 2012.

Other News About KR
Kroger Reports Fourth Quarter and Full Year 2011 Results
A look at Kroger's strong earnings.
Kroger profit beats as low prices draw shoppers
Kroger outpaces its rivals in a challenging environment Other Stocks in the News
Safeway Beats Estimates, Margins Lag
Safeway's margins slip on rising costs.
Wendy's swings to Q4 profit to meet Street view, sales top
Another sign of a turnaround at an often overlooked fast food stock.

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Published on Mar 5, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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