Solid quarter from Kroger expected Thursday

Analysts are looking for strong revenue and profit growth from the grocer.

By Benzinga Dec 4, 2013 5:16PM

Kroger logo on a grocery cart (© Brian Christopher/Demotix/Demotix/Corbis)By Nelson Hem


Kroger (KR), which has announced some management changes since naming its next CEO in September, is scheduled to report its third-quarter results Thursday before the opening bell.


Investors will be looking for news on the progress of the Harris Teeter takeover, expected to close in January, and any hints of future acquisitions. The company has also been studying methods for ordering groceries online, and no doubt will continue to track customer patterns and push its private label brands.


Analysts on average predict that Kroger will say that its revenue for the quarter grew more than 4 percent year-over-year to $22.77 billion. Earnings of $0.53 per share are also in the consensus forecast. That would be up from $0.46 per share in the same period of last year.


The analysts seem confident, as that consensus earnings per share (EPS) estimate is unchanged from 60 days ago. Note that Kroger matched consensus EPS expectations back in the second quarter, which ended at least three quarters in a row of earnings beats.


In the second-quarter report, Kroger patted itself on the back for 39 consecutive quarters of positive same-store supermarket sales. Furthermore, the company maintained its full-year EPS guidance and its plans to use cash flow to repurchase shares and pay dividends. The share price rose around six percent in the days following the second-quarter report.


Looking ahead to the current quarter, the analysts' consensus forecast calls for a year-on-year decline of about 16 percent in EPS on sales that slipped less than three percent. So far, full-year EPS are expected to be up about six percent on a rise of more than 2 percent in revenues, relative to the previous year.


The company

Kroger is the nation's largest strictly supermarket chain operator, with more than 1,000 supermarket locations under banners such as Kroger, Dillons, King Soopers and Ralphs. One of the world's largest retailers, it also manufactures food products and operates department stores, jewelry stores and convenience stores.


The company was founded in 1883 and is now headquartered in Cincinnati. It is an S&P 500 component and has a market capitalization of almost $22 billion. David B. Dillon has been the chairman and chief executive since 2004, but Rodney McMullen, currently chief operating officer, will become CEO on Jan. 1.


Competitors include Safeway (SWY), Supervalu (SVU) and Whole Foods (WFM), as well as the likes of Costco (COST) and Wal-Mart (WMT).


Safeway missed EPS estimates in the most recent quarter and is rumored to be a takeover target. Cost cutting helped Supervalu post better-than-expected results. The forecast for Whole Foods calls for sequential and year-on-year EPS growth.


During the three months that ended in October, Kroger raised its dividend by 10 percent, announced its CEO succession plan, was named to Dow Jones Sustainability Index and reached a new labor agreement with the union in the Dallas/Ft. Worth area.


Performance

The long-term EPS growth forecast is more than eight percent, and the return on equity is about 26 percent. But the price-to-earnings (P/E) ratio is greater than the industry average. Kroger's dividend yield is about 3 percent.


The number of Kroger shares sold short, as of the Nov. 15 settlement date, represents a little more than 1 percent of the total float. That was the lowest level of short interest in at least a year, after falling since mid-September. It would take less than two days to close out all of the short positions.


The consensus recommendation of the 17 analysts surveyed by Thomson/First Call who follow the stock is to buy shares, and it has been for at least three months. Their mean price target, or where they expect the stock to go, is about the same as the current share price. But a positive surprise or rosy guidance could prompt hikes of individual price targets.


Shares have faced resistance below $43 in recent weeks, but the share price still is up more than 13 percent in the past 90 days. The share price also is above the 200-day moving average. Over the past six months, the stock has outperformed Supervalu, Whole Foods and even Costco and Wal-Mart.


At the time of this writing, the author had no position in the mentioned equities.


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