With the stock up 50% so far this year, investors had high expectations heading into Kroger's (NYSE:KR) third-quarter earnings release. They weren't disappointed. The grocery store chain posted record results this morning that easily beat Wall Street's targets on both the top and bottom lines. The stock responded by jumping 3% in early trading to push further into record territory.
Kroger's third-quarter profit clocked in at $0.69 per share, which was 21% above the prior year and higher than the $0.61 per share that analysts had forecast. Management cited a boost in fuel margins as one key reason for the profit beat. But surprisingly strong customer traffic helped as well. Sales improved 11% year over year to $25 billion, also ahead of expectations.
Comparable-store sales spiked higher by 5.6% and again led almost all other major national food retailers.
Kroger beat Whole Foods' 3.1% comps gain and handily outgrew both Target and Wal-Mart. Only Costco, with its popular warehouse membership model, is consistently growing faster than Kroger right now.
Impressively, the grocery store chain has now posted accelerating comps gains in each quarter of the year: 4.6% in the first quarter, 4.8% in the second, and 5.6% in the quarter that just closed.
"Our associates continue to execute our Customer First strategy, which is building loyalty beyond the weekly ad and showing yet again that focusing on our customers creates value for our shareholders," CEO Rodney McMullen said in a press release accompanying the results.
Meanwhile, Kroger's debt level is still uncomfortably high, sitting at a record $11.5 billion thanks to the recent expensive purchases of Harris Teeter and web retailer Vitacost. In relation to earnings, debt held steady at 2.3 times EBITDA, above management's goal of roughly two times adjusted profit.
Kroger is aiming to return to that healthier debt level by the end of next year. And to help get there, management has taken an ax to spending on stock repurchases. The company shelled out just $100 million on buybacks in the first and second quarters, as compared to $1.7 billion in the prior two quarters. In the third quarter, Kroger repurchased 600,000 shares for a total of $29 million.
Kroger raised its full-year profit guidance for the second time this year, saying that it now expects earnings of $3.35 per share. And while the company didn't say it, comparable-store sales gains should also come in ahead of the official target. Kroger back in September issued a forecast for annual comps gains of about 3.75%. But given the grocer's strong performance through the first three quarters of the year and its holiday quarter forecast of 5% comps gains, it is almost certain that Kroger will close out the year solidly above that annual target.
"We intend to continue our positive momentum through the fourth quarter," McMullen said.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Costco Wholesale and Whole Foods Market. The Motley Fool recommends Costco Wholesale and Whole Foods Market. The Motley Fool owns shares of Costco Wholesale and 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.