For Grocer Kroger, Growth Is A Staple

7/27/2015


  Recent Price
$39
  Dividend
$0.42
  Yield
1.1%
  P/E Ratio
21
  Shares (millions)
984
  Long-Term Debt As % Of Capital
64%
  52-Week Price Range
$38.87 - $24.29

In each of the last four quarters, Kroger ($39; KR) boosted same-store sales at a faster rate than in the year-earlier period. During that stretch several rivals, including Whole Foods Market ($41; WFM) and The Fresh Market ($32; TFM), saw growth decelerate in at least three quarters.

Kroger has embraced the rising popularity of organic products by leveraging its position as a huge, traditional supermarket to make this food cheaper for health-conscious and aspirational shoppers alike. The company claims to be the second-largest U.S. retailer of natural and organic food. Kroger is a Focus List Buy and a Long-Term Buy.

Business breakdown

Annual revenue has risen in 28 straight years. Revenue for fiscal 2015 ended January rose more than 10%, marking Kroger's strongest annual gain since fiscal 2000. What drove that growth? The combination of 5.2% higher same-store sales excluding fuel and the $2.5 billion acquisition of Harris Teeter.

Same-store sales, now up in 46 straight quarters, are benefiting from food inflation, more households shopping at Kroger, and a higher frequency of store visits by those households. Food inflation weakened in May and could remain soft in the second half of the year, which in turn could drag on sales.

But Kroger says product volumes are rising and it continues to take market share. Both trends emboldened management in June to raise its fiscal 2016 growth target for same-store sales excluding fuel to 3.5% to 4.5% from an earlier range of 3.0% to 4.0%.

Fuel, typically 15% to 20% of company revenue, has weighed on results in recent months. Fuel sales slumped 26% in the April quarter after slipping 1% in fiscal 2015. Kroger's profit margin for fuel also contracted last quarter.

In June, Kroger announced a 14% hike to its quarterly dividend — its second increase in nine months. The stock yields just 1.1%, but seven of the nine dividend hikes announced since the distribution was reinstated in 2006 have equaled 10% or more. Free cash flow rose 5% to $813 million in the 12 months ended April. Also in June, Kroger announced a two-for-one stock split, its fifth since 1979. The split took place July 14.

Kroger expects per-share profits of $1.90 to $1.95 in fiscal 2016, which implies an increase of 8% to 11% — consistent with its long-term growth target. The consensus projects per-share profits of $1.95 this year and $2.15 in fiscal 2017. Management hinted that it may raise its full-year guidance if commodity prices, particularly for gasoline, settle down. Kroger has topped the consensus in 14 of the past 15 quarters.

Conclusion

The stock produced a total return of 60% over the past 12 months, pushing its trailing P/E ratio to 21, a 51% premium to its 10-year median. Yet Kroger's shares trade roughly in line with the median S&P 1500 food retailer based on trailing earnings and at a 5% discount based on estimated earnings for the current year.

An annual report for The Kroger Co. is available 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
Apr '15
0.63
vs.
0.55
0%
38.87
-
34.08
22 - 19
Jan '15
0.52
vs.
0.41
9%
35.03
-
27.85
21 - 17
Oct '14
0.35
vs.
0.27
11%
28.06
-
24.29
18 - 15
Jul '14
0.35
vs.
0.30
12%
25.75
-
22.66
17 - 15
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
108.47
1.72
0.34
35.03
-
17.57
20 - 10
2014
98.38
1.45
0.31
21.92
-
13.77
15 - 9
2013
96.75
1.32
0.25
14.00
-
10.49
11 - 8
2012
90.37
1.00
0.22
12.93
-
10.57
13 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
83
66
49
93
39
75
81

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


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