- Kroger’s beat Wall Street earnings estimates but fell short of top-line consensus.
- Consumers like Kroger’s merchandise strategies.
- Kroger experiments with new technologies, layout and design.
Retail conglomerate Kroger (NYSE:KR) announced its Q4 FY 2015 earnings on March 3, 2016. The company reported earnings per share of $0.57, beating Wall Street estimates of $0.54 per share. However, the company fell short of the street's top line estimates of $26.19B, reporting sales of $26.165B. The market took a dim view of Kroger’s failure to meet consensus revenue estimates and punished its stock price, which fell by 7% during the regular trading session following the earnings release. However, long-term investors should take note of the opportunity to purchase an aggressively expanding business at a lower price as Kroger’s strategies are paying off for its stakeholders.
Merchandise mix resonates
Kroger’s same-store sales expanded 5% in its FY 2015 when factoring out fuel, with deflation in some areas serving as a headwind. Management asserted that its merchandise strategies are really paying off. Kroger’s Simple Truth organic merchandise brand now represents a $1.5 billion dollar brand just three years after its launch. To put that in context, this represents 10% of the $15.4 billion reported by rival Whole Foods Market (NASDAQ:WFM) in its FY 2015, meaning that there’s plenty of market share for Kroger to grab.
Consumers want quality and value and Kroger’s consumers get that from the "Simple Truth" brand. On the note of value, Kroger sold $20 billion worth of its “corporate brands” private label products, representing an eye-raising 18% of its FY 2015 revenue. This provides further evidence that consumers watch every dime spent at the grocery store, and Kroger knows how to deliver on that front.
Kroger constantly experiments with store layout and formatting. Kroger also likes to hedge bets based on its diverse portfolio of retailing businesses. Kroger management talked about the Main & Vine layout that will offer a mixture of “specialty”, “local” and “everyday products”. This stems from management’s belief that some consumers like normal merchandise in addition to something new and exciting. Kroger also asserted that its Marketplace concept, which houses everything from groceries and dry goods to restaurants, resonates well with consumers. A Kroger Marketplace leaves you with the impression of a cross between a Walmart (NYSE:WMT) Supercenter and Kroger’s traditional grocery store format.
Like home improvement retailer Home Depot (NYSE:HD), Kroger understands that consumers increasingly gravitate towards online shopping. Consumers accustomed to online shopping are reluctant to put effort into physically shopping when they could point, click and receive merchandise at their doorstep. This also applies to groceries as online retailers, such as Amazon (NASDAQ:AMZN), increasingly offer groceries.
Kroger discussed its ClickList program, which will allow consumers to order online and then pick up at the store. The program has expanded into seven markets. Kroger is also experimenting with home delivery. I believe that any retailer that can effectively compete with Amazon and other e-commerce retailers will need to utilize its current store infrastructure as a means to launching a delivery system into the local market.
A company can still perform well and not beat expectations. This was the case for Kroger. In FY 2015, Kroger saw its revenue, net income and free cash flow expand 1%, 18% and 12%, respectively, YoY. Margins expanded across the board due in part to commodity price deflation in products such as meat. Kroger’s balance sheet remained in the same relative shape as last year. Its long-term debt, which includes obligations under capital leases, held steady at around $9.7 billion. Gains in reported operating income contributed to a better margin of safety in terms of interest coverage. Times interest earned came in at 7.4 in FY 2015 versus 6.4 in FY 2014.
Kroger maintains discipline with its dividend. The company paid out 26% of its free cash flow in dividends in FY 2015 versus 25% in FY 2014. Kroger’s current dividend rate represents a 17% YoY growth. Right now the company pays its shareholders $0.42 per share, yielding 1.1% annually.
Kroger currently resides at the No. 2 spot in the National Retail Federation’s list of top 100 retailers. Kroger continues to acquire companies that add to its technologies and geographic footprint (which adds scale), enabling it to compete with the top player, Walmart. While Kroger didn’t talk about a possible acquisition of The Fresh Market (NASDAQ:TFM), don’t be surprised if it does.
Kroger goes to great lengths to give the consumers what they want. Its management believes this represents the core to maintaining its edge in the highly competitive market and this should help Kroger find itself in the No.1 spot at some point in the future.