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Kroger (NYSE: KR ) reported its second-quarter earnings recently. While its second-quarter sales were strong and increased for the 31st consecutive quarter, the company failed to meet Wall Street's estimates.
Looking at the numbers
Sales for the quarter (excluding fuel) increased by 5.3% from a year ago. Added to that was a sluggish economy that strained the budget of Kroger's customers. But a closer look at the numbers shows that the rise in profits was basically because of higher prices on the products.
Net profit increased 7.3% to $280.8 million. The product prices had risen during the quarter, but Kroger chose not to transfer the higher prices completely to the customer. Though the profit margin was affected, Kroger gained the advantage of lower prices in the marketplace because its industry peers had transferred the effect of higher prices to the customers. This led to an increase in sales and helped Kroger outpace its strongest competitors such as Safeway (NYSE: SWY ) , Whole Foods Market (Nasdaq: WFM ) , and SUPERVALU (NYSE: SVU ) .
Customers have been buying cheaper products, which seems to have shrunk profits for the second quarter. However, the fuel operations have generated higher earnings per share as compared to 2010.
Kroger's EBITDA return on net operating assets, or ERONOA, looks good at 19.91%, which is an increase of 106 basis points. ERONOA is four quarters EBITDA divided by net operating assets. This is used by the company to measure the efficiency of its operating units.
Kroger is planning new strategies like launching new soda flavors for its Big K brands on the basis of the customer feedback, which could attract more customers.
The Foolish bottom line
Even with the industry facing tough times because of rising prices, Kroger has managed to deliver in a tough environment. This is a really positive sign. Foolish investors should take notice.