Kroger Offers A Special On Growth

11/18/2013


  Recent Price
$42
  Dividend
$0.66
  Yield
1.6%
  P/E Ratio
15
  Shares (millions)
521
  Long-Term Debt as % of Capital
60%
  52-Week Price Range
$43.85 - $24.19

Over the last year, Kroger ($42; KR) delivered per-share-profit growth of 27%, well above the average of 21% for S&P 1500 Index food retailers. In an industry known for stiff competition and thin profit margins, Kroger managed to gain market share and boost its operating margin to 4.5% from 4.2% a year earlier.

While profit growth is likely to slow from the recent pace, we buy Kroger's prospects. The consensus projects per-share-profit growth of 15% for the October quarter, 7% for the year ending January 2014, and 11% for the year ending January 2015.

Kroger is a Focus List Buy and a Long-Term Buy, and below we present five key numbers that support our confidence in Kroger's ability to exceed growth targets:

39. The number of consecutive quarters with same-store sales growth. We expect that streak to continue when Kroger declares October-quarter results early next month. In each of the last 23 quarters, Kroger's growth has outpaced the industry. On Oct. 30, Kroger projected full-year same-store-sales growth toward the top half of an earlier range of 2.5% to 3.5%.

$3.41 billion. Kroger's operating cash flow in the 12 months ended July, up 37% from year-earlier levels. Free cash flow more than tripled.

19%. The decline in Kroger's share count over the last three years, when it spent a net $2.97 billion on buybacks. Given the company's solid cash flow, we expect buybacks to continue.

94. Kroger's Quadrix Overall score. The retailer also ranks at least that high in both of our sector-specific scores.

9.7 million. The number of digital accounts Kroger customers have created. Consumers have downloaded 385 million digital offers, and Kroger's mobile shopping application is among the top 2% in downloads at Apple's ($520; AAPL) app store.

You will not have to overpay for Kroger's growth. At 15 times trailing earnings, Kroger trades 33% below the median food retailer in the S&P 1500 Index. The stock sports at least 22% discounts based on price/sales, price/operating cash flow, and enterprise ratio. Given Kroger's valuation, you'd never know that its shares have risen 61% so far this year, nearly double the gain of the S&P 1500 Consumer Discretionary Sector Index.

Given the grocery group's run-up, it's no surprise that Kroger, like most of its rivals, trades at a premium to its own historical norms. But at less than 14 times projected earnings in the year ending January 2015, Kroger seems reasonably valued relative to the 8% to 11% profit growth it expects to deliver over the long term.

The $2.5 billion acquisition of Harris Teeter ($49; HTSI), announced in July, will fuel some of that growth. The merger should add more than $4 billion to revenue and $0.06 to $0.09 to per-share earnings in its first full year after the deal closes, probably in the current (January) quarter.

At the end of October, Kroger operated 2,418 grocery stores in 31 states, selling a lot more than food. Nearly 2,000 locations feature in-store pharmacies and nearly half include fuel centers. In addition, the company operates more than 780 convenience stores and nearly 330 jewelry stores.

You can obtain an annual report for Kroger Co. at 1014 Vine St., Cincinnati, OH 45202, (513) 762-4000, www.kroger.com.

KROGER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jul '13
0.60
vs.
0.51
5%
39.97
-
32.77
14 - 12
Apr '13
0.92
vs.
0.78
3%
35.24
-
27.53
13 - 10
Jan '13
0.88
vs.
0.63
13%
28.00
-
24.19
12 - 10
Oct '12
0.46
vs.
0.33
6%
25.44
-
21.57
11 - 10
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
96.75
2.63
0.50
28.00
-
20.98
11 - 8
2012
90.37
2.17
0.43
25.85
-
21.14
12 - 10
2011
82.19
1.76
0.39
24.14
-
19.08
14 - 11
2010
76.73
1.71
0.37
24.80
-
19.39
15 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
84
76
86
36
55
82

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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