Kroger Stock Craters After Earnings

It's been a couple of weeks now since we put Kroger (NYSE: KR  ) stock through its paces and examined how it compares to rival supermarkets Harris Teeter (UNKNOWN: HTSI.DL  ) and The Fresh Market (NASDAQ: TFM  ) in such areas as valuation (P/E ratio), historical performance (growth in years past), future prospects (estimates growth rates), and cash production (free cash flow). But in the meantime, Kroger was preparing a report card of its own.

Yesterday, Kroger reported its financial results for the first fiscal quarter of 2013. With these results in hand, it's time to shift from how Kroger stock compares to the competition to whether it's a bargain in its own right. Let's begin.

 For Q1 2013, Kroger reported:

  • $30 billion in sales, a 3% increase over Q1 2012
  • worse gross margins than a year ago, down 15 basis points at 20.65%
  • but also lower operating costs, down 21 basis points
  • which helped to boost per-share net profits to $0.92, up 18% from last year

Investors weren't thrilled with the numbers, sending Kroger stock down 6.1% in Thursday trading. Was this the right call?

Well, after subtracting capital expenditures from operating cash flow, Kroger ended Q1 with $999 million in free cash flow for the quarter. That number was 32% bigger than the company reported one year ago. It was also more than 106% bigger than Kroger's net earnings number: $484 million.

As a result, Kroger now boasts trailing free cash flow of $1.1 billion -- still not quite as good as its trailing earnings of $1.5 billion, albeit the gap is narrowing.

Valuation matters
Now, is $1.1 billion a big enough cash haul to justify buying Kroger stock? It depends. It's certainly more money than the mere $21 million Fresh Market has managed to generate over the past year or the $29 million FCF number at Harris Teeter. Of the three, Kroger still looks like the relative best value.

That said, $1.1 billion in free cash still leaves Kroger stock costing more than 15 times FCF, which is kind of a stretch for a firm that's only expected to grow profits at 7% annually over the next five years and that's carrying more than $8.6 billion in debt on its books. (A debt number, by the way, that grew in the most recent quarter.)

For the record, Kroger management is still insisting it can grow earnings at closer to 8% to 11% annually over the long term, and grow its dividend to boot. Personally, though, I'd still like to see the stock get a bit cheaper or see evidence of growth rates closer to 13% to 14% before buying in.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On June 22, 2013, at 10:22 PM, oldnews123 wrote:

    First off Kroger will never do any better if they have the same crappy managers they have now. i have experience off the central division managers and the ones i have worked for were rude and not fair and when you go to corporate management they dont listen. until they listen to the little people they will never get any better. and being union helps to a point but not all the way. they wonder why their stocks are falling..... when you treat your employees like crap they go elsewhere to spend their hard earned money. essentially the kroger employees should also be the biggest customers but they arent because they do not feel valued at all.

  • Report this Comment On June 22, 2013, at 11:11 PM, BlyndDaDoush wrote:

    Do you think that the Dow being down 450 points the same day Kroger reported earnings had anything to do with the stock selling off an "oh so horrible" 6%.

    I would say... Most definitely.

    And I wouldn't call basically a 5% sell off "cratering".

    Kroger will be 40$ a share within a month. You mark

    My words.

  • Report this Comment On June 23, 2013, at 3:59 AM, corvettesam wrote:

    Get rid of that rediculas Kroger Card that you have to bring to the store to get a reasonable price. My wallet is too full of cards now that everyone wants you to have to get points, discounts and credits.

  • Report this Comment On June 23, 2013, at 5:09 AM, bestwaytoriches wrote:

    Rich,

    I love my local Kroger and I love my discount card and lower cost to my gas prices I get from KR.

    but KR $33 went up to fast and has to back fill. Once KR moves back to $ 28 i will buy back in. but for now RAD $2.86 will give you much better returns. Valuations are half that of KR and volume and increased institutional buying will push RAD up faster than KR.

    RAD is still 1/10 it's peer pricing and soon will take it;s fair value $ 27

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