Supermarket chain Kroger (NYSE:KR) will report first-quarter 2007 financial results tomorrow, June 26.

What analysts say:

  • Buy, sell, or waffle? When you can take on Wal-Mart (NYSE:WMT) and survive, no one thinks of selling your stock, which could explain why, of the 15 analysts covering the supermarket, seven say buy and eight rate it a hold.
  • Revenues. Sales are expected to rise nearly 5% to $20.3 billion as Kroger expands its supercenters concept.
  • Earnings. Profits are expected to increase a healthy 14% to $0.48 per share as the chain continues to keep expenses in check and expands its organic food offerings.

What management says:
By challenging Wal-Mart on its own turf -- Kroger's supercenters are in 32 of the mass merchant's markets -- Kroger has shown itself immune from the "black death effect" of having the industry leader in your backyard. Most everyone else has died, but not all. Kroger is still standing strong as it brings furniture, appliances, home furnishings, and even jewelry to the grocery store. By taking on Whole Foods (NASDAQ:WFMI) with a wide selection of organic produce, Kroger is ceding none of the market to the competition. The improved selection and quality of merchandise has led to rising same-store sales, which chairman and CEO David Dillon says is "the key driver of our objective to increase earnings and create value for our shareholders."

What management does:
Operating cost containment has allowed Kroger to expand its margins even in the face of rising fuel costs and stock option expenses. Buying back shares, reducing debt levels, and paying a healthy 1% dividend yield has been steadily increasing shareholder value.

Margin

01/06

05/06

08/06

11/06

02/07

Gross

23.7%

23.5%

23.3%

23.3%

23.2%

Operating

3.5%

3.4%

3.3%

3.4%

3.6%

Net

1.6%

1.6%

1.6%

1.6%

1.7%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Kroger isn't sitting still -- it just concluded the purchase of 20 Farmer Jack stores from The Great Atlantic & Pacific Tea Co. (NYSE:GAP). Additionally, the company seeks to hire 3,000 new employees and is currently in the interviewing process. It also avoided a possibly contentious strike in Dallas where it had taken ads to hire replacement workers if the union struck. But a deal has been reached, although specifics have not yet been released. The company has had labor relations issues in the past, and avoiding a confrontation this time around should keep things running smoothly for the grocer.

Kroger remains competitively valued in comparison to Safeway (NYSE:SWY), although the last time I noted such a relative value, the supermarket chain put me to shame with its growth spurt. Yet at eight times EBITDA (earnings before interest, taxes, depreciation, and amortization) it's on par with Safeway, A&P, and SUPERVALU (NYSE:SVU), if at a discount to Whole Foods. After the 36% run-up in price so far this year, the stock is selling close to its fair value.

Related Foolishness:

Kroger has earned a four-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the stock-rating service by joining today. It's free!

Wal-Mart is a recommendation of Motley Fool Inside Value, where a 30-day free trial subscription puts you on the express line to all of the market-beating recommendations. Whole Foods is a recommendation of Motley Fool Stock Advisor.

Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy takes advantage of sales with its Kroger Plus card.