Analysts' Choice

1/25/2016


  Recent Price
$38
  Dividend
$0.42
  Yield
1.1%
  P/E Ratio
19
  Shares (millions)
979
  Long-Term Debt As % Of Capital
59%
  52-Week Price Range
$42.75 - $27.32

Kroger's ($38; KR) stock has rallied 18% since the end of 2014, while the S&P 1500 Index shed 10%. But the shares have struggled in the past month, partly due to rival grocer Supervalu ($4; SVU), which mentioned unexpectedly high food deflation at its discount chain of Save-A-Lot stores.

Although Kroger has acknowledged lowering prices in every area of its stores, it has also shown a knack for growing in virtually any environment. Its same-store sales excluding fuel have risen in 48 straight quarters (and exceeded 4.0% growth in each of the past eight quarters). Kroger's customers may also be less price sensitive than those who patronize discounters. Finally, grocery volumes tend to rise when prices fall, minimizing deflation's effects on growth.

We view the stock's pullback as a buying opportunity. Kroger is a Buy and a Long-Term Buy.

Cheap energy fattens margins

Kroger's strategy focuses on making midsized acquisitions, investing in existing stores, and expanding its offerings of natural and organic products. These efforts are paying off, as same-store sales excluding fuel rose 5.5% through the first nine months of fiscal 2016 ending Jan. 31. That growth was broad, with all supermarket departments other than fuel generating higher same-store sales for the nine months ended October.

Kroger also represents an indirect play on cheaper energy prices. Lower fuel prices have hurt Kroger's sales. Total revenue held flat in the first nine months of fiscal 2016, as the retailer's 23% slump in gasoline sales (14% of revenue) offset 6% growth in nonfuel sales.

Yet slumping oil prices have improved Kroger's profitability. For the October quarter, the retailer's profit margins on gasoline sales reached their highest point in seven years. Low fuel prices have also reduced Kroger's transportation costs. Additionally, low natural-gas prices have lowered production costs for Kroger's private-label food business. Companywide operating profit margins have expanded in five straight quarters.

Conclusion

For the January quarter, Kroger expects same-store sales to climb 4% to 4.5% excluding fuel. Kroger's guidance also implies per-share profits of $0.52 to $0.54, equating to flat to 4% growth. The consensus stands at $0.54 per share. Kroger has topped the consensus profit estimate in each of the past eight quarters and seems capable of doing so again. In early December, Kroger said same-store sales were trending toward the high end of its guidance. The company also said it expected profit margins for fuel to fall back to more normal levels. However, U.S. oil prices retreated to 12-year lows in January, suggesting Kroger's profit margins could remain elevated.

At first blush, Kroger's shares don't look cheap, with a Quadrix Value score of 41. At 19 times trailing earnings, the stock trades 29% above its five-year average. But the valuation of 17 times estimated year-ahead earnings compares favorably to the grocery-store median of 18 and the consumer-staples sector median of 20.

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
Oct '15
0.43
vs.
0.35
0%
39.43
-
27.32
20 - 14
Jul '15
0.44
vs.
0.35
1%
39.34
-
34.05
21 - 18
Apr '15
0.63
vs.
0.55
0%
38.87
-
34.08
22 - 19
Jan '15
0.52
vs.
0.39
9%
35.03
-
27.85
21 - 17
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
108.47
1.76
0.40
35.03
-
17.57
20 - 10
2014
98.38
1.43
0.34
21.92
-
13.77
15 - 10
2013
96.75
1.32
0.31
14.00
-
10.49
11 - 8
2012
90.37
1.00
0.25
12.93
-
10.57
13 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
81
41
93
42
97
89

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


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