Kroger Stock A Buy After Q1 2016 Earnings?

  • Kroger’s earnings per share came in at $0.70 versus the $0.69 expected.
  • Consumer demand is up.
  • Kroger demonstrated rock solid growth on a fundamental level.

On June 16, retail conglomerate Kroger (NYSE:KR) released its Q1 FY 2016 earnings. The company’s earnings per share (EPS) exceeded expectations by a penny clocking in at $0.70. However, revenue did fall short coming in at $34.604 billion versus $34.663, according to Zacks. However, I found several elements of the Kroger’s earnings call encouraging, subsequently solidifying my bullish viewpoint on its underlying business. Good business prospects could potentially translate into superior shareholder gains. Let’s examine.

Comparable store sales

Same store sales growth came in at a respectable 2.4%, which is good. However, I like digging deeper on this aspect of the retailing business. Same store sales could be artificially inflated by price increases. Improved traffic and volume represent better measures of a retailer’s health. Interestingly, Kroger's management indicated that its traffic increased while customers decreased their personal expenditures per trip.

However, the overall tonnage of merchandise expanded giving indication of demand increase, which is what any publicly traded business owner wants to see. Management speculated that shoppers want fresh foods, which implies less refrigeration time and encourages increased visitation. I would speculate further that customers feel comfortable enough with the store experience to increase visits, which represents a good thing.

Vision

Kroger’s thoughtfulness on the future of retail was embedded throughout the earnings call. Management indicated no tolerance for apathy. Kroger understands that people increasingly shop online and purchase from online retailers, most notably at Amazon (NSDQ:AMZN). Kroger touted the potential of ordering online and picking up at the store service ClickList. The company talked about how the service increases the convenience for the consumer.

Also, Kroger talked about the scalability of the service, which means it could get bigger as customers lean more heavily towards shopping online. Priorities on analytics were evident in the call. In the digital age, analytics will be essential in anticipating customers’ needs as well as profitably offering coupons.

Kroger’s desire for a bigger claim on the organic food market is evident this quarter. As anticipated, Kroger management talked about its strategic partnership with organic grocer Lucky’s Market. Kroger expects to learn a great deal about the organic food market from Lucky’s Market. Also, Kroger hinted that its organic merchandise line, Simple Truth, is off to a good start.

Great fundamentals

Overall, Kroger turned in some rock solid fundamental numbers in Q1. Revenue, net income and free cash flow expanded 5%, 10% and 17%, respectively, YoY. Kroger’s balance sheet remains in good shape with its $1.3 billion in cash equating to 20% of stockholder’s equity. Its long-term debt and leasing obligations reside in the high range at 151% of stockholder’s equity. Operating income exceeded interest expense by eight times, which is ok. The rule of thumb for safety lies at five times or more.

Kroger exudes prudence in its capital return policies, buying back fewer shares during exuberant times. In the most recent quarter, Kroger only paid out 10% of its free cash flow in dividends. Excitably, Kroger’s management indicated that its dividend could increase over the long-term. Currently, the company pays its shareholders $0.42 per share per year and yields 1.2% annually.

Conclusion

Kroger not only understands its competitive landscape but faces it head on. The customer is its focal point, and the company fully realizes that technology is key in fulling their wants and needs. If any company can survive or even thrive in the new digital retailing landscape, I believe Kroger can. As icing on the proverbial cake, Kroger trades at the low valuation of 17 versus 24 for the S&P 500. Kroger stock definitely deserves a second look by the long-term investor.

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  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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