Cincinnati-based Kroger (KR: Charts, News, Offers) surprisingly beat earnings this week, despite rising commodity costs and a shaky retail environment. Kroger, one of the largest grocery retailers in America, posted earnings of 70 cents per share, a 20.7% increase over the same period last year. Revenue increased 11% to $27.5 billion. On average, analysts expected the company to earn 64 cents per share on revenue of $26.4 billion.
For fiscal 2011, Kroger now expects its fiscal 2011 earnings to reach the higher end of its increased forecast range of $1.85 to $1.95 per share, up from its prior guidance to $1.80 to $1.92 per share. Its identical supermarket growth, which excludes fuel centers, is expected to increase 3.5-4.5%, up from its original forecast of 3-4%. The company was significantly boosted by its fuel centers, which benefited from the rising cost of crude oil. Including its fuel centers, Kroger’s same-store sales increased 10% to $25.26 billion, with total revenue climbing 11% to $27.46 billion. Excluding fuel centers, same-store sales increased 4.7% while total revenue rose 4.8%.
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“Our guidance for the year reflects the balance we strive to achieve across our business,” stated CEO David Dillon, “including strong identical sales growth and outstanding cost control, as well as increased earnings and earnings per share.” Dillon cited increased its fuel centers, supermarket sales volume, improved productivity and cost reductions as the company’s primary drivers last quarter.
Kroger currently holds $174.1 million in cash and $256.8 million in short term investments. Net debt increased $47.3 million from the same period last year. As part of its $1 billion share repurchase program announced in March 2011, the company bought back 23.1 million shares at $23.55 for a total of $544.3 million. Kroger currently operates 2,449 supermarkets in 31 states, some under local banners such as Fred Meyer, Ralph’s, Fry’s, Smith’s Food 4 Less and King Soopers.
Although Kroger currently dominates the grocery industry, competitors such as Wal-Mart (WMT: Charts, News, Offers) and Target (TGT: Charts, News, Offers), which have been highly successful with their respective Wal-Mart Superstore and Super Target formats, are becoming viable threats with their “one-stop” appeal to shoppers. Supermarkets such as Kroger are also highly vulnerable to pricing wars, in which competitors attempt to lure in customers with the lowest local prices in an effort to maintain a high-volume, low-margin sales model. Kroger has been trying to pass on the modest cost increases caused by inflation and high commodity prices with slight price increases, which have not dented the company’s earnings yet. Kroger’s own Kroger Value brand also benefits from higher national brand prices.
Kroger’s aforementioned fuel center business is important to its bottom line, and the company has expanded its current tie-in with Shell Oil.A to allow shoppers to earn discounts – those using Kroger cards can earn discounts at Shell gas stations – which has proved popular as both gas and food prices remain high. 1,000 of its 2,449 locations now have fuel centers, and have benefited from the approximate $1 per gallon increase in gas prices incurred by customers last year.
While the stock is a conservative play, it is a safe bet in uncertain times, paying a quarterly dividend of 10.5 cents per share. The company’s trailing P/E of 13.2 trades at a discount to the industry average of 16.5, and its PEG ratio of 1.33 suggests that it is fairly valued at current levels. Shares rallied nearly 5% during Thursday trading.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
It looks like they are doing a good job. I guess Wal-Mart’s bot the unstoppable juggernaut everyone thinks they are.