Is Kroger Destined to Succeed?

What makes Kroger a good long-term buy?

Jan 21, 2014 at 4:28PM

American retail giant Kroger (NYSE:KR) has witnessed 40 consecutive quarters of positive identical-store sales growth. Does this mean that the company will maintain this stellar performance in the future as well?

Let's see where the company is heading and how it stacks up with competitors Safeway (NYSE:SWY) and Whole Foods Market (NASDAQ:WFM)

Third-quarter earnings
In the most recent quarter, Kroger met the consensus earnings estimate by reporting earnings per share of $0.53. The earnings represent a 15% increase from the $0.46 per share which the company had earned in the comparable period last year. 

On the sales front, the grocery store giant posted slightly lower-than-expected results. This occurred because of low spending by shoppers as they continued to feel the stress of a slow economic recovery. Kroger's sales increased by 3.2% to $22.5 billion from $21.8 billion in the year-ago quarter. Identical-store sales also grew 3.5% in the quarter.

During the quarter, the company spent $148 million to repurchase 3.6 million of its common shares. While looking at the last four quarters we find that the company has had strong free cash flows which have helped it return over $752 million to investors in the form of share repurchases and dividends.

Kroger has been performing consistently well, which is evident from its five-year sales growth rate of 6.58%. The company's earnings per share also increased by 9.56% over the past five years. Net operating cash flow grew by 6.58% from last year which shows that the company is generating more cash through its operating activities.

What is Kroger up to?
Kroger's management is confident about the company's business model as Kroger continues to gain market share by offering low prices on selected items to help customers who are pressurized by a sluggish economic recovery. The company remains focused on its most loyal customers and believes that they are the reason why it achieved positive identical-store sales for 40 consecutive quarters. From 2003, loyal households have massively increased by 83%. The total loyal household count grew throughout the third quarter as well, which contributed massively to Kroger's sales growth.

The company looks forward to increasing its market share by adding square footage in saturated areas, following its long-standing strategy. Furthermore, the company is also focusing on new markets such as Texas, Michigan, and Dallas. Kroger continued to make investments as its capital expenditures totaled $641 million in the third quarter, from $474 million in the year-ago quarter. For the full year, Kroger expects capital expenditures of around $2.4 billion. This will further help the company increase its band of loyal customers.

Kroger is on track to acquire Harris Teeter for $2.5 billion with the deal expected to close by February. The company is expected to benefit from Harris Teeter's experience and knowledge in fresh foods and this will help Kroger expand its geographic footprint into high-growth-potential areas of the U.S.

Kroger projects identical-store sales growth of 3%-3.5% in the final quarter of fiscal year 2013. Management reaffirmed its earnings guidance of $2.73 -$2.80, which is in-line with the company's long-term earnings growth rate of 8%-11% per year.

Competitors
Safeway recently sold its Canadian business to Sobeys, a subsidiary of Empire Company Limited, for $5.8 billion. Safeway expects to use the proceeds from the deal to pay down $2 billion of debt and fund its share repurchase program and future investments. Safeway reported lower than expected earnings per share of $0.10 in the last quarter and also lowered its earnings guidance to $0.93-$1.00 per share.

Safeway's board of directors have increased the authorization level for the stock repurchase program by $2 billion. Safeway will repurchase shares at suitable times depending on ongoing market conditions. Moreover, Safeway plans to close its operations in the Chicago market by early 2014 to focus its attention on areas where it already has a stronger business.

The supermarket chain Whole Foods Market reported mixed results for its final quarter of 2013. Earnings exceeded the Zacks estimate by $0.01 to stand at $0.32, but revenue fell short of expectations by $37 million. However, Whole Foods' sales saw an increase of 11% from the comparable period last year. Whole Foods' earnings guidance for the first quarter of 2014 was lower than expected which is perhaps why investors have a grim outlook on the future prospects of the company. This is reflected in the stock price of Whole Foods, which saw an 8% decrease after the quarterly results were announced. 

Final thought
Kroger continues to post strong earnings growth which supports the company's long-term goals. Although Kroger reported slightly lower-than-expected sales this quarter, I believe that Kroger's sales will increase incrementally in the future as the economy recovers and the company's effective strategies which focus on loyal households start to pay off on a large scale. The company is confident about its future outlook as it expects its identical-store sales to keep on growing. Kroger's share repurchase program coupled with investments like Harris Teeter reinforce my belief that the company is set to grow in the future and it will prove to be a valuable investment opportunity.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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