Foolish Forecast: Kroger Keeps It Healthy

Supermarket chain Kroger (NYSE: KR  ) will report its third-quarter financial results tomorrow. With an increasingly tough retail environment, and Wal-Mart (NYSE: WMT  ) encroaching on its space, can the grocer successfully fend off both threats?

What analysts say:

• Buy, sell, or waffle? The 15 analysts covering the supermarket are optimistic about Kroger's future. Eight rate it a buy, seven say "hold."
• Revenues. Sales are expected to rise more than 6% to $15.6 billion, as Kroger continues to expand its "supercenter" concept.
• Earnings. Profits are expected to increase by a healthy 17%, to $0.35 per share, as the chain continues to keep expenses in check and expands its organic food offerings.

What management says:
The supermarket industry is occasionally subject to labor strife, and Kroger has had its share, but last month it settled a contract with its own workers, forestalling a walkout. With that trial behind it, Kroger is taking to new ventures to try and boost sales, including a deal with NASCAR and an arrangement to promote gift cards for some 200 merchants. Rivals Safeway (NYSE: SWY  ) and SUPERVALU (NYSE: SVU  ) are both implementing their own variations on the latter, hoping to save their shoppers time, money, and energy.

What management does:
Although top-line margins have been compressed as costs have increased, other cost-cutting measures implemented have been able to flow down to the bottom line, allowing the company to continue to expand. Safeway and SUPERVALU exhibit slightly better margins than Kroger, yet analysts consider Kroger's long-term growth prospects slightly better, anticipating nearly 11% annual growth.

Margin	08/06	11/06	02/07	05/07	08/07
Gross	23.8%	23.8%	23.2%	23%	23%
Operating	3.4%	3.4%	3.5%	3.5%	3.6%
Net	1.6%	1.6%	1.7%	1.7%	1.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
At 17 times trailing earnings, and 15 times 2008's projected earnings, Kroger is valued similarly to its competition. Little has changed since I looked at the supermarket chain six months ago, when I proclaimed it "fairly valued"; since then, its shares have eased a bit. I'm seeing little evidence that its valuation will advance from its current range.

The convenience of buying holiday gift cards at the supermarket might be a consumer's dream of one-stop shopping, but it seems likely to be an incremental benefit to Kroger at best. With Safeway and SUPERVALU also offering cards and gifts, Kroger may actually get far more mileage from its decision to offer store-prepared meals. For harried holiday shoppers with a long list of gifts to get, I'd think that grabbing a prepared prime-rib dinner would be more of a benefit than an aisle full of gift cards.

Related Foolishness:

• Kroger Labors to Profit
• Foolish Forecast: Kroger's Immune to Competition
• Check Out Kroger's Growth