Kroger's Second-Quarter Earnings Preview: What Wall Street's Saying

NEW YORK (TheStreet) - Wall Street is expecting good things when grocery chain, Kroger (KR) , reports fiscal second quarter results on Thursday.

The Cincinnati-based company, which labels itself as the nation's largest grocery retailer, is expected to report earnings of 69 cents a share on revenue of $2.49 billion for the July-ending quarter, according to Thomson Reuters. Same store sales are expected to rise 4.2% for the quarter, according to Consensus Metrix.

The company has been expanding its reach and most recently looking to expand online and into the growing natural products category, which will pit it against Whole Foods (WFM) . In July, Kroger agreed to acquire Vitacost.com, an online retailer of vitamins and other nutritional products, for $280 million in cash.

Last week, Kroger said it plans to hire an additional 20,000 employees to fill permanent positions in its supermarket division. Kroger operates approximately 2,640 supermarkets and department stores in 34 states under brands including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's, the company says. It also operates 786 convenience stores, 320 fine jewelry stores, 1,240 supermarket fuel centers and 37 food processing plants in the U.S.

Shares are up 38% over the past 12 months and rose an additional 0.25% to $51.87 on Wednesday. Here's what analysts are saying leading into earnings.

Ajay Jain, Cantor Fitzgerald (Hold; $47 PT)

With Kroger set to report 2Q earnings on Thursday 9/11, we think the stars are aligned from an operational standpoint. The Harris Teeter transaction is off to an excellent start, in our view, and based on the quality of earnings beat in 1Q, we believe Kroger continues to execute at a very high level. The recently updated guidance could still be potentially conservative, in our view. We do think, however, that the inflation outlook is worth staying on top of heading into 2H.

With the stock up 42% over the past 12 months, the stock reflects a very strong outlook and potential for market share gains amid continued industry consolidation, in our view. With KR trading at a 25-30% premium to its five-year historical average, we think the valuation is full.


Rupesh Parikh
, Oppenheimer (Outperform; $65 PT)


A few months ago we initiated coverage of KR with an Outperform rating and $55 PT (on 6/2 at $47.74). Year-to-date KR shares are up 33%, outpacing a gain of 9% in the S&P 500. Above-plan results and increasing confidence in KR management have boosted shares, in our view. We believe KR remains well positioned to drive at least 3-5% ID sales expansion and low double-digit EPS growth going forward, driven by continued solid execution, tailwinds from an improving US labor market, and market share gains from struggling competitors. Based on our analysis, KR's multiple historically peaks when unemployment bottoms. KR shares currently trade at about 15x NTM estimates vs. peaks of 17x in prior periods.

We expect KR to report Q2 (Aug.) EPS of $0.70, ahead of a consensus figure of $0.69. We forecast an ID sales (ex. fuel) increase of 4-5%. This assumes a flattish two-year ID trend with Q1 (May).

Meredith Adler, Barclays (Equal Weight, $48 PT)

We hope to hear commentary on inflation; sales trends; consumer behavior; the competitive environment; success of growth capital investments; the integration of Harris Teeter; plans for Vitacost and e-commerce more generally; and uses of cash for debt repayment, stock buybacks or other purposes.

KR's stock continues to move up slowly and steadily, despite the major upward revaluing that has occurred over the past two years. We believe this is a result of more investors buying the stock as a kind of safe haven given the company's strong comps, its ability to beat its guidance, and the overall stability of results over the past few years. We remain confident in KR's ability to manage well through the current environment but believe the stock fully reflects this at 15.8x our FY14 EPS of $3.30, well above its average forward P/E of ~12x.

TheStreet Ratings team rates KROGER CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate KROGER CO (KR) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 3.3%. Since the same quarter one year prior, revenues slightly increased by 9.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 38.85% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, KR should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • KROGER CO has improved earnings per share by 6.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, KROGER CO increased its bottom line by earning $2.90 versus $2.77 in the prior year. This year, the market expects an improvement in earnings ($3.28 versus $2.90).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Food & Staples Retailing industry average. The net income increased by 4.2% when compared to the same quarter one year prior, going from $481.00 million to $501.00 million.
  • Net operating cash flow has increased to $1,780.00 million or 10.08% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -14.71%.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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