Kroger's (KR) Q4 Earnings Miss Estimates, FY19 View Soft

The Kroger Co. (NYSE:KR) reported fourth-quarter fiscal 2018 results, wherein the bottom line not only missed the Zacks Consensus Estimate but also declined year over year. Management also provided muted earnings view for fiscal 2019. Clearly, all these are not well perceived by investors as the stock fell during the pre-market trading session.

We note that shares of Kroger have advanced 3.4% so far in the year compared with the industry’s growth of 5.5%.

Let’s Introspect

The company delivered adjusted earnings of 48 cents a share that fell short of the Zacks Consensus Estimate of 53 cents and declined 23.8% from 63 cents reported in the prior-year quarter. Adjusting for 53rd week in fiscal 2017, bottom line fell 11.1% from 54 cents reported in the year-ago quarter.

This Cincinnati, OH-based company now envisions fiscal 2019 net earnings in the band of $2.15-$2.25 per share. We note that the guided range is below the current Zacks Consensus Estimate of $2.28, which could witness a downward revision in the coming days. However, the range fared better than the adjusted earnings of $2.11 per share reported in fiscal 2018.

Total sales declined 9.5% to $28,091 million from the prior-year quarter. Excluding fuel, the 53rd week in fiscal 2017, the convenience store business unit divestiture and the merger with Home Chef total sales jumped 1.6%. The company’s identical sales, excluding fuel, grew 1.9%. Management now expects identical sales growth, excluding fuel, to be between 2% and 2.25% in fiscal 2019.

We note that gross margin increased 10 basis points to 22%, after shrinking 80 basis points in the preceding quarter. Meanwhile, excluding fuel, the 53rd week in fiscal 2017, and the LIFO credit, gross margin fell 93 basis points during the quarter under review, after declining 91 basis points in the third quarter. Management hinted that gross margin contracted due to changes in mix as well as investments in supply chain and in price.

Strategic Endeavors

The grocery industry has been undergoing a fundamental change, with technology playing a major role and the focus shifting to online shopping. Kroger, which faces stiff competition from bellwethers such as Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) , has taken stock of the situation and is in the process of giving itself a complete makeover.

The company is expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. The company’s “Restock Kroger” program is also gaining traction. Management is also targeting “margin-rich alternative profit streams.” The company also attained more than $1 billion in cost savings through process improvements. Digital sales surged 58% during fiscal 2018 and Pickup or Delivery reached 91% of Kroger households.

Kroger has been intensely working toward enriching customers’ shopping experience via innovations and enhancement of the e-commerce capabilities. To this end, the company has launched Kroger Pay, a mobile payment app. Also, it has rolled out the Kroger REWARDS debit card — a rewarding payment service. Kroger also expanded its Home Chef Express meal kits nationwide.

The company also partnered with Microsoft (NASDAQ:MSFT) to enhance customers’ shopping experience through data driven technology. The company is aggressively working toward more convenient grocery delivery options. In this regard, the company has started using Nuro’s fully autonomous, driverless R1 vehicles for grocery delivery services.

Other Financial Aspects

Kroger ended the quarter with cash of $411 million, total debt of $15,229 million, and shareholders’ equity of $7,835 million. Total debt decreased $360 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.83 compared with 2.65 in the year-ago period. In the trailing four quarters, the company bought back $2 billion of shares and paid $437 million in dividends.

The company invested $3 billion in capital in fiscal 2018. Management project capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — to be in the range of $3-$3.2 billion in fiscal 2019.

Bottom Line

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. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.

Kroger carries a Zacks Rank #3 (Hold). A favorably-ranked stock includes Carrefour (PA:CARR) SA (OTC:CRRFY) having a long-term earnings growth rate of 10.8% with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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