What does this Organic Retailer Have to Say?
riddhi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cincinnati-based grocer Kroger (NYSE: KR) has struggled in 2012, with the company attempting to attract customers despite a weak U.S. economy and rising food prices. The prospects appear to be looking up, as the company raised its earnings outlook during its last quarterly report. Kroger, the nation's largest traditional supermarket chain, runs stores under the banners: Kroger, City Market, Dillons, Jay C, and Fred Meyer, among others. Its results can serve as a bellwether for the industry.
By reasonable standards, I would say that Kroger had a solid quarterly result, but not spectacular. Let’s check it out.
Solid but not spectacular
Kroger managed to beat EPS estimates, though the company's revenues failed to top expectations. The company reported 51 cents per share versus the 49 cents per share estimate and revenues of $21.73 billion versus the $29.13 billion estimate. For the past four quarters, revenue has been rising consistently by almost 4%, with comps up 3.6% on a 1.4% improvement in volume. It was the 35th consecutive quarter of positive identical-store sales for Kroger, whose success was attributed to investments in price and service that drove increases in customer loyalty.
Net earnings were down by 0.6% from last year’s figures, to $279.1 million, which the company attributed to paying higher taxes. EPS were up due to a reduction in the number of shares. The company repurchased 23.7 million common shares for a total investment of $525 million.
Also merchandise costs, which include advertising, warehouse, and transportation expenses has increased and as a result the grocery store chains face higher costs to stock food; as the worst drought in decades works its way up the food chain. But grocers have limited ability to raise prices with the number of choices cost-conscious consumers now have for groceries. But a silver lining has been fuel. Margins have been strong in the face of higher-oil prices. And gasoline is something consumers can't go without.
A dominant position among the nation’s largest grocery retailers enables Kroger to sustain growth in the top line, expand its store base, and boost its market share. The company’s strong corporate and national brands help win customer loyalty, which helps in providing strong value proposition to consumers, and positions it well to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel). Management continues to deploy capital to concentrate more on remodeling, merchandising, and other viable projects.
When it comes to environmentally sound and savvy practices, The Kroger Co. is boasting some impressive progress that’s saving the company millions of dollars and boosting sales. In 2011, the world’s largest grocer saved enough energy to power every single home in Columbus, Ohio, for a year. Kroger also has 19 manufacturing plants that operate without sending any waste to landfills. And, the company has just begun converting unsold organic food into renewable energy that powers its Ralphs/Food 4 Less facilities.
Kroger has saved more than $100 million a year as a result of their energy reduction initiatives in 2008.
As a large retail grocer, Kroger faces competition from similar chains, local stores, and niche stores, such as Whole Foods Market (NASDAQ: WFM), and Supervalu (NYSE: SVU). Wal-Mart (NYSE: WMT), however, represents the most significant long term threat to the firm's continued growth.
Whole Foods Market’s total revenue has climbed at least 11% for the past 10 quarters. It sells a private-label brand called 365 Everyday Value to appeal to customers on a budget. The brand includes items such as kettle-cooked potato chips, all-natural soda, and balsamic vinegar.
Kroger is also fighting to hang onto shoppers and for this Kroger's loyalty program offers customers discounts based on their past purchases. Like other supermarkets, Kroger has been paying more to stock its shelves as a result of rising commodity costs. The company has tried to offset the impact by introducing more store-brand items, which decreases its need to stock up on brand-name products. Unlike Supervalu, who rely predominantly on acquisitions to grow revenue, Kroger focuses on growing revenue through increasing identical store sales. Supervalu parent to Albertsons, Save-A-Lot, and other chains, earlier this week announced it would close about 60 of its struggling markets this year. In June, Supervalu said its first-quarter profit fell by nearly half, as revenue tumbled and for this it plans to close 60 underperforming stores to boost its profits down the road.
In order to increase its margins and compete against Wal-Mart's lower prices, Kroger continues to invest in its private labels. Customer service improvements, which recently have included significantly reducing wait times in check-out lines, also have helped Kroger hold its own against Wal-Mart. Wal-Mart has indicated it is looking to expand its chain of Wal-Mart Express outlets, which are 12,000 to 15,000 sq. ft. in size. Wal-Mart sells a wide variety of goods ranging from apparel to groceries. Because of its scale, the retailer is often able to offer below-market prices to its customers.
Kroger is up 9.41% over the last year vs. S&P 500 Total Return up 26.62%, Whole Foods Market up 49.30%, and Supervalu down 66.38%.
Kroger expects to achieve in the upper end of the range for both earnings per share and sales growth. As a result of strong first half performance and higher than anticipated share repurchase activity, Kroger is increasing its fiscal 2012 earnings guidance to a range of US$2.35 to US$2.42 per diluted share. The company continues to expect identical supermarket sales growth for the full year, excluding fuel, of 3% to 3.5%.
The Bottom Line
Kroger has been drawing more customers through its doors, but costs have been rising too, and the overall effect led the supermarket chain to post a slight dip in earnings in this quarter.
The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, and growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated. Commodities prices and labor costs also are a continuing challenge for pricing and margins. Kroger took a step to reward investors by hiking its quarterly dividend by 30%, to 15 cents per share. There are indications of a bullish outlook.
I believe that Kroger might be a good addition to your investment portfolio, and trumps some of its peers in that regard, therefore you should consider putting Kroger on your shopping list.
Riddhi2406 has no positions in the stocks mentioned above. The Motley Fool owns shares of SUPERVALU INC. and Whole Foods Market. Motley Fool newsletter services recommend Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.