Are Ingles Markets Earnings Threatened by the Kroger-Harris Teeter Deal?

Ingles Markets (NASDAQ: IMKTA  ) will release its quarterly report on Monday, and investors have been pleased to see shares of the regional grocery-store chain rise to levels not seen since before the financial crisis. Yet from its vantage in the Southeastern U.S., Ingles Markets has to be concerned about the impact that Kroger's (NYSE: KR  ) proposed buyout of Harris Teeter (NYSE: HTSI  ) might have on the competitive landscape in the region, with a potential threat to Ingles' future prospects looming over the company's stock.

Ingles Markets is a small regional chain with about 200 stores scattered across the Carolinas, Georgia, Tennessee, Virginia, and Alabama. In addition to its grocery operations, Ingles also maintains an affiliated real estate rental business, essentially taking advantage of its status as an anchor tenant to lure other retailers to its shopping centers. But with Kroger already having had a presence in its territory and with the Harris Teeter acquisition only strengthening Kroger's footprint in the region, will Ingles be able to sustain its competitive position? Let's take an early look at what's been happening with Ingles Markets over the past quarter and what we're likely to see in its report.

Stats on Ingles Markets

Analyst EPS Estimate

$0.62

Change From Year-Ago EPS

12.7%

Revenue Estimate

$1.02 billion

Change From Year-Ago Revenue

2.4%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

What does the future hold for Ingles Markets earnings?
In recent months, analysts have kept steady on their projections on Ingles Markets earnings, leaving both short-term quarterly estimates and longer-range future projections unchanged. The stock has lost its upward momentum, though, falling 9% since early September.

Part of the reason for the Ingles' share-price declines came from the company's second-quarter earnings release back in August. Revenue gained 1.5%, but Ingles reported a net loss for the quarter, reversing a year-ago loss. Yet the earnings hit that Ingles took during the quarter was largely the result of a refinancing transaction that reduced the company's interest expenses substantially, replacing debt paying 9.5% with later-maturing debt carrying a 5.75% rate.

But the bigger news affecting Ingles was Kroger's purchase of Harris Teeter back in July for $2.44 billion. The deal still hasn't closed, pending regulatory approval of the merger. But given Harris Teeter's reputation for high-quality products and Kroger's size, the combination could prove formidable for Ingles, making it potentially difficult for it to respond effectively.

The obvious question for Ingles is whether it itself might be an acquisition target. With an incredibly low price-to-book ratio, Ingles looks bargain-priced for any acquirer that wants to bolster its presence in the Southeast. Even with the stock having climbed in part due to exactly that sort of takeover speculation, Ingles shares still look attractively priced compared even to similarly sized small regional chains elsewhere in the country. That could make it a smart pick-up for companies like Food Lion operator Delhaize or Dutch grocery operator Royal Ahold, which owns the Northeast-centered Stop & Shop chain and could look to expand downward along the Eastern Seaboard.

In the Ingles Markets earnings report, watch to see whether the company gives any hints that it's aiming to put itself up for sale. The grocer has done a reasonably good job of supporting its own growth, but with M&A activity on the rise, Ingles needs to position itself well to take full advantage while the environment is favorable.

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