Is This Grocer on Sale?

Sidhi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It seems to be an upbeat season for retailers who are painting good numbers as they continue to discover more about customer tastes and preferences and using it effectively to get money out of their pockets. For The Kroger Co. (NYSE: KR), America’s largest grocery store chain, it turned out to be no different as it posted strong third quarter results.

Buying Numbers

For the third quarter, Kroger reported revenue of $21.81 billion, which on a GAAP basis, was around 6% higher than the same period last year. Even though there was a slight dip in the gross margin numbers, the net margin improved around 50 basis points than the last year quarter. Kroger has been beating the Street's EPS estimates since the last couple of quarters, as it posted a GAAP EPS of $0.60 this quarter.

The company has put in good efforts in monitoring changes in gas and fuel prices as well as overall inflation. The growth strategies are in place for leveraging the rising customer confidence along with tight expense control and feasible expansion plans.

Kroger recently launched Simple Truth and Simple Truth Organic brands, which exclude the artificial flavors and preservatives, and are growing rapidly as they have been well aligned with customer demand. The same store sales, or as the management calls it, the identical sales, grew at 3.2% without fuel, which is commendable as they are being able to sustain growth on a consistent basis.

Talking Competition

Kroger amongst others directly competes with the huge elephant that is Wal-Mart (NYSE: WMT), which is stepping up its investment in grocery products and by leveraging its efficient supply chain, providing value to its customers. The company attracted shoppers across the globe during the Black Friday weekend by offering huge discounts along with improved customer service quality. The company has maintained the trust of various stakeholders by showcasing consistent strong performance and sustainable growth strategies.

SUPERVALU (NYSE: SVU) has not recently been performing really well amidst concerns of a gloomy economy and stiff competition. The company has lost significant cash over the last couple of years and even though it showcased better than expected results in the last quarters, it was not quite sufficient to bring it safely out of the dive. Private equity firm Cerberus Capital is in talks with SuperValu for buying out some of its chains.

Target (NYSE: TGT) has been showing consistent performance and it has good scope of growth as spending figures are improving for the developed economies. Target scored well on the Black Friday pitch as it showcased some new moves in terms of approaching high-end luxury products.

Safeway (NYSE: SWY) has been doing well when it comes to sales, delivering consistent figures over the past few years. However the bothering part is that its operating margins have not followed the same line and declined significantly. Since the stock is not quite overvalued at this point in time (trading at P/E ratio of around 8), good results will ensure upward movement in the share price.

Conclusion

To begin with, Kroger is working towards the acquisition of Axium pharmacy, a leading specialty pharmacy, which will create a good synergy.

Looking at the cash flow for the company, it has increased around 23% over the same period last quarter. Its impressive the way management has kept a good command over expenses, which compensated for factors like fuel prices and inflation to a good extent. As has been outlined in the earnings call, cash will be used in the direction of giving value to the share holders via share repurchase, dividends and also working on the funding expenditures that will fuel growth.

One key metric that matters to supermarket chains like Kroger is loyal household growth, which gives management a good sense of how the company is linking with its loyal customers. As for Kroger, the loyal household count increased across all the divisions. This reiterates the point that Kroger has put efforts and improved in the area of customer service inside the stores. Their customer first strategies have yielded well in terms of bonding further with the customers increasing brand presence in times of stiff competition.

As the result of a strong quarter, Kroger management has raised the outlook for fiscal 2012 to $2.44 to $2.46 for the full year, up from the previous range of $2.35 to $2.42. The management has expressed concern over return on invested capital that declined around 20 basis points from same quarter last year. The company has laid down specific targets to improve ROIC over time.

The stock is currently trading at a P/E ratio of around 19, which is higher than the average P/E for the industry, which indicates that the stock is slightly overvalued and the company would have to fuel sustainable growth to justify such valuation.

I would not recommend building a new position in the stock, but you might want to hold the stock as it shows promising scope for better growth.


sidhikharkia has no positions in the stocks mentioned above. The Motley Fool owns shares of Supervalu. Motley Fool newsletter services recommend Supervalu. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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