Can Kroger's Surprising Rally Continue?

On Thursday, Kroger (KR 0.92%) will release its latest quarterly results. Yet investors have already reaped the benefits of a major move up for the stock, which has responded well to signs that the company could find renewed growth in what many believed was a maturing business with no true prospects.

Kroger's grocery stores don't have the cutting-edge panache of some of the natural-foods-focused stores that the company's competitors operate, but that hasn't stopped Kroger from making the most of the grocery business. Still, with relatively little pricing power to boost revenue above costs, groceries always run with very little margin for error. Let's take an early look at what's been happening with Kroger over the past quarter and what we're likely to see in its quarterly report.

Stats on Kroger

Source: Yahoo! Finance.

Can Kroger's earnings keep impressing investors?
Analysts have mostly held steady on their views of Kroger's earnings recently, keeping their April-quarter estimates unchanged and boosting their consensus for the current fiscal year by a penny per share. The stock, though, has continued advancing sharply, rising more than 12% since mid-March.

Kroger has done a great job keeping its earnings up even in trying times for the grocery industry. In its previous quarterly report, Kroger posted 13% revenue growth in reversing a year-ago loss, crossing expectations and giving better-than-expected guidance for the full fiscal year. Annual sales growth of 2.5% to 3.5% might not sound like much, but Kroger has learned to do as much as it can with the revenue it earns.

Much of Kroger's success has come from its early recognition that it needed to jump on the potential of store brands to boost margins. ConAgra's (CAG +1.73%) Ralcorp unit and its peers have seen substantial growth in recent years in producing the private-label items that companies like Kroger sell under their own brand names, and Kroger has used private-label sales to keep its stock moving upward even as rivals Safeway (NYSE: SWY) and SUPERVALU (SVU +0.00%) have suffered from their focus on the struggling mid-tier grocery market. Safeway only managed 1.5% same-store sales gains in its most recent quarter, compared to double that for Kroger, and Safeway's operating margins are barely half Kroger's levels.

Yet what many people don't know about Kroger is that it has a much more diversified set of store offerings. It operates convenience stores as well as a set of high-margin jewelry business chains, giving it some additional chances to benefit from better economic conditions. Still, what Kroger doesn't offer is the emphasis on natural foods that have helped its specialty rivals.

In Kroger's report, watch for discussion of how the company is responding to the SUPERVALU reorganization. As competitive conditions change, Kroger has to adapt in order to avoid getting stuck in the traps that have held its competitors down over the years.

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