Kroger (KR) Q1 Earnings Beat, Revenues Miss, View Intact

The Kroger Company (NYSE:KR) , one of the largest grocery retailers, recently posted first-quarter fiscal 2016 earnings of 70 cents a share that beat the Zacks Consensus Estimate by a penny, and surged 12.9% from 62 cents earned in the prior-year quarter. Shares were up nearly 3.3% during pre-market trading hours.

The Cincinnati, OH-based Kroger confirms fiscal 2016 earnings per share projection of $2.19–$2.28 per share. Management further hinted that earnings may come at the low-end to mid-point of this range based on current fuel margin trends. The current Zacks Consensus Estimate for fiscal 2016 stands at $2.23.

Total sales (including fuel center sales and Roundy's Inc.) grew 4.7% to $34,604 million from the prior-year quarter but missed the Zacks Consensus Estimate of $34,663 million. Management stated that excluding fuel center sales, total sales rose 7.8%, while excluding Roundy's, total sales without fuel rose 3.5% in the final quarter.

The company’s identical supermarket sales (stores that are open without expansion or relocation for five full quarters), excluding fuel center sales, grew 2.4%, marking 50^th consecutive quarter of growth. Kroger continues to expect identical supermarket sales (excluding fuel) growth of 2.5% to 3.5% for fiscal 2016. Including fuel center sales, identical supermarket sales rose 0.4%.

We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

The company is now providing ClickList and ExpressLane online ordering services in 25 markets. However, intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.

Operating income jumped 8.9% year over year to $1,200 million, whereas operating margin expanded 20 basis points to 3.5%.

Kroger, which competes with Target Corporation (NYSE:TGT) , ended the quarter with cash of $375 million, total debt of $12,386 million, and shareholders’ equity of $6,448 million. Total debt increased $1,079 million from the prior-year period. Management continues to forecast capital expenditures, excluding mergers, acquisitions and purchases of leased facilities, to be in the band of $4.1–$4.4 billion in fiscal 2016.

Kroger, which operates 2,778 retail food stores, maintain a Zacks Rank #4 (Sell). Other better ranked stocks include The J. M. Smucker Company (NYSE:SJM) sporting a Zacks Rank #1 (Strong Buy) and Wal-Mart Stores Inc. (NYSE:WMT) carrying a Zacks Rank #2 (Buy).