Grocery chain operator Kroger Co. (KR) Tuesday reported a 12.6% year-over-year increase in profit for the first quarter, helped by strong cost controls, despite a 1.5% decline in quarterly sales. However, excluding fuel sales, sales rose 3.9% from last year. Earnings per share for the quarter rose 13.8% from last year and topped analysts' expectations by five cents. The company also confirmed its earnings forecast for the full year 2009, in line with consensus estimate.
As a large retail grocer, Kroger faces stiff competition from similar chains, local and niche stores, such as Whole Foods Market, Inc. (WFMI), Supervalu, Inc. (SVU) and Safeway, Inc. (SWY). However, Wal-Mart Stores, Inc. (WMT) represents the most epochal long-term threat to Kroger's continued growth, due to its lower prices and close proximity Kroger stores in many of the areas it operates. As Wal-Mart sells a wide variety of goods ranging from apparel to groceries, the retailer is often able to offer below-market prices to its customers.
In order to compete, Kroger has focused on its six-year-long strategy of improving customer service and making its stores a one-stop solution for customers' daily needs. While Kroger has diversified through acquisitions, adding jewelry and general merchandise to its mix, food stores still account for about 85% of its sales. Kroger, unlike many other grocery chains, has been benefiting from the recession, as consumers flock to a one-stop place like a Kroger store to buy food in an effort to save fuel.
In a statement, Chairman and Chief Executive Officer, David Dillon said, "Customers continue to look for value, and Kroger is helping them save money by offering a unique combination of products and services no other competitor can match. By paying close attention to the changing needs of today's shoppers, Kroger continues to refine what it offers customers through lower prices, friendly service and innovative stores that are appealing and convenient."
First Quarter Results
The Cincinnati, Ohio-based company reported net income of $435.1 million or $0.66 per share for the first quarter, higher than $386 million or $0.58 per share in the prior-year quarter.
On average, 15 analysts polled by Thomson Reuters expected the company to report earnings of $0.61 per share for the quarter. Analysts' estimates typically exclude special items.
Including fuel sales, total sales for the quarter declined 1.5% to $22.80 billion from $23.14 billion in the same quarter last year, and fell shy of twelve Wall Street analysts' consensus estimate of $23.28 billion. Excluding fuel sales at Kroger's supermarket fuel centers and convenience stores, total sales increased 3.9% over the prior year.
Peer Performance
Among Kroger's peers, Pleasanton, California-based Safeway posted in April a decline in profit for the first quarter to $144.2 million or $0.34 per share from $193.4 million or $0.44 per share last year, impacted by negative currency exchange effects and lower fuel sales as well as a shift in holiday sales. Quarterly sales dropped 7.6% to $9.24 billion from $10 billion in the same quarter last year.
In April, another peer, Eden Prairie, Minnesota-based Supervalu slipped to a loss in its fourth quarter to $201 million or $0.95 per share, compared with a profit of $156 million or $0.73 per share in the prior-year quarter, reflecting non-cash impairment charges and acquisition related costs. Net sales rose to $10.82 billion from $10.4 billion in the previous year.
Last month, retail giant Wal-Mart reported first-quarter net income of $3.02 billion or $0.77 per share, compared with $3.02 billion or $0.76 per share in the year-ago quarter. Quarterly revenues edged down to $94.24 billion from $94.94 billion in the same quarter last year.
Other Metrics
Operating profit for the first quarter rose to $843.9 million or 3.70% of total sales, from $769.1 million or 3.32% of total sales in the prior-year quarter. Operating, general and administrative expenses were $4.03 billion or 17.70% of total sales, up from $3.89 billion or 16.81% of total sales, in the year-ago quarter.
Kroger, which also operates the Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, and Dillons brands, said identical supermarket sales for the first quarter, including fuel centers, edged down 1.1% to $20.55 billion, and sales, excluding fuel centers, advanced 3.1% to $19.05 billion from the year-ago quarter.
Comparable supermarket sales, excluding fuel centers, edged down 0.8% to $21.31 billion, and comparable supermarket sales, including fuel centers, grew 3.4% to $19.73 billion from last year.
Kroger defines a supermarket as identical when it has been open without expansion or relocation for five full quarters, and defines a supermarket as comparable when it has been open
for five full quarters, including expansions and relocations.
During the quarter, the company's First-In First-Out or FIFO gross margin rose 129 basis points to 24.36% from last year. Excluding retail fuel operations, FIFO gross margin edged up 5 basis points and supermarket selling gross margin on non-fuel sales fell 48 basis points.
The company recorded a $23.1 million Last-In First-Out or LIFO charge during the first quarter, down $16.9 million from last year. Excluding retail fuel sales, the LIFO charge declined 9 basis points as a rate of sales compared to the prior year.
During the quarter, the average retail price for a gallon of gas sold at Kroger's fuel outlets was 41% lower than in the same quarter last year.
Capital expenditure for the quarter, excluding acquisitions, totaled $653.5 million, higher than $636.7 million in the same quarter last year. The company ended the first quarter with cash and cash equivalents of $637.6 million, compared to $307.2 million at the end of the prior-year quarter.
During the first quarter, Kroger repurchased 0.95 million of stock at an average price of $20.83 per share for a total investment of $19.8 million, and $476.1 million remained under the $1 billion stock repurchase program announced in January 2008.
Looking Ahead ...
"The strength of our Customer 1st strategy and the flexibility of our business model enable us to continue to deliver value for both customers and shareholders in a difficult environment. We are investing in Kroger's long-term growth as we work to emerge in an even stronger position as the economy recovers," Dillon added.
For fiscal 2009, Kroger backed its prior earnings guidance for full-year in the range of $2.00 to $2.05 per share. Analysts expect the company to report earnings of $2.03 per share for the full-year 2009.
The company also continues to expect identical supermarket sales, excluding fuel sales, to grow in the range of 3% to 4% for fiscal 2009.
Analysts Comments
Last month, Credit Suisse Analyst Kelly upgraded Kroger shares to 'Outperform' from 'Neutral' and increased its price target to $26 from $24, as investor concerns over the earnings risk related to the disinflation and the weak consumer appear to be overdone. While the analyst expects sales growth to weaken throughout the year, a stronger-than-expected gross margin might enable the company to attain its earnings forecast.
Further, Kelly opined that the near-term outlook for supermarkets remains challenging as the weak consumer and disinflation would pressure sales and earnings, but these issues are temporary/well understood and the analyst actually see reasons to be more optimistic.
Stock Quote
In Tuesday's regular trading session, KR is currently trading at $21.50, down $0.28 or 1.29% on a volume of 7.29 million shares. In the past 52-week period, the stock has been trading in a range of $19.39 to $30.99.
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