- Analysts estimate Kroger Q4 2015 earnings per share to come in at $0.54 per share.
- Kroger’s management should discuss its competitive strategy in the organic grocery arena.
- Expect minor degradation in free cash flow and its balance sheet for the year.
Kroger Q4 2015 earnings are scheduled for release on March 3, 2016. Analysts expect Kroger (NYSE:KR) to report EPS of $0.54 on revenue of $26.3B, as per Yahoo finance. The analyst consensus implies a 4%YoY earnings growth and a 4.2% YoY growth in revenue. On a yearly basis, analysts expect Kroger’s earnings to come in at $2.04, representing a 16% YoY increase. Acquisitions motivated by the desire for scale, as well as increasing customer traffic, would drive any potential earnings beat. However, there are a few key things to look out for in the upcoming earnings release.
Expect Kroger’s management to discuss the importance of focusing on the consumer. They assert the understanding that the consumer pays the bills in retailing. On that note, Kroger understands that consumers increasingly desire food and beverages that are perceived to be healthy. “Organic grocers”, such as Whole Foods Market (NASDAQ:WFM), experienced a relative monopoly for this particular market niche until Kroger and Walmart (NYSE:WMT) started offering organic groceries of their own. This fervor to compete with organic grocers contributed to Kroger’s same store sales expansion of 5.5% for the three quarters ending in November. Rumors circulating around the financial community indicate that Kroger wants to expand its organic offerings via a possible acquisition of The Fresh Market (NASDAQ:TFM).
Kroger ranks No. 2 on the National Retail Federation's list of top retailers behind Wal-Mart. Kroger understands the benefits of scaling. The company’s acquisition spree over the past two years gives indication that it wants to expand its scale to the point where it may eventually overtake Wal-Mart at the top.
Kroger recently completed the acquisition of tiny grocery chain Roundy’s. This and the possible acquisition of The Fresh Market would allow even more pricing power for Kroger. This represents more bad news for companies like Whole Foods Market, which tend to charge high prices for its products. The Kroger Marketplace format offers not only groceries, but also prepared foods and even dry goods such as clothing and toys. These stores should also enable Kroger to compete more effectively with the Wal-Mart Supercenters.
Will Kroger's Free Cash Flow Continue Its Decline?
Investors will expect good top line growth when Kroger reports its Q4 results. However, investors should also expect a small decline in free cash flow for the year. Kroger’s free cash flow declined 6% YoY in the three quarters ended in November. A 22% YoY increase in capital expenditures, due to heavy investing in its business, contributed to the decline in free cash flow.
Investors should also keep their eyes on Kroger’s debt. Kroger tacked on another $1.1 billion in long-term debt to purchase Roundy’s, according to Bloomberg. This is on top of the $9 billion of long-term debt and capital lease obligations it had at the end of the last quarter. Kroger’s year-to-date operating income exceeded interest expense seven times versus six times at the same time in 2014. with an adequate interest coverage ratio, Kroger should be able to maintain its margin of safety on the interest cost front.
Kroger definitely takes a proactive approach to competing with juggernauts like Wal-Mart and its smaller organic rivals such as Whole Foods Market. It wouldn’t surprise me to see Kroger overtake Wal-Mart as the No. 1 retailer at some point in the future. However, long-term investors should be mindful of its use of debt in its acquisition strategy and should keep an eye on Kroger's interest coverage ratio.