After registering earnings beat in the first quarter of fiscal 2017, The Kroger Co. KR succumbed to a negative earnings surprise of 2.5% in the second quarter. The grocery retailer posted earnings of 39 cents a share that missed the Zacks Consensus Estimate by a penny and declined 17% from the prior-year quarter. As a result, shares are down nearly 7% during pre-market trading hours.
Lately, this supermarket chain has been going through a rough patch. Stiff competition, volatility in food prices, an aggressive promotional environment and soft traffic are the primary headwinds plaguing the provider of daily need items. We observed that the stock has underperformed the industry in the past three months. Over the said period, the stock has plunged 26%, while the industry has declined 1.8%. Kroger’s shares came under pressure, after the news of Whole Foods Market’s buyout by Amazon.com Inc. AMZN surfaced.
Nevertheless, management reiterated its fiscal 2017 adjusted earnings guidance of $2.00-$2.05 per share. The current Zacks Consensus Estimate for fiscal 2017 is pegged at $1.99.
Total sales grew 3.9% to $27,597 million from the prior-year quarter and also came ahead of the Zacks Consensus Estimate of $27,380 million, marking the fourth straight quarter of revenue beat. Excluding fuel center sales, total sales rose 3.8%. Digital revenue surged 126% on the back of ClickList.
The company’s identical supermarket sales (stores that are open without expansion or relocation for five full quarters), excluding fuel center sales, grew marginally by 0.7% to $21,702 million, whereas including fuel center sales, identical supermarket sales jumped 0.9% to $24,471 million. Kroger now envisions identical supermarket sales growth, excluding fuel, to be 0.5-1% for the balance of the fiscal year.
Operating income increased 2% year over year to $678 million, whereas operating margin remained flat at 2.5%.
Other Financial Aspects
Kroger, which faces competition from Wal-Mart Stores, Inc. WMT, ended the quarter with cash of $319 million, total debt of $14,048 million, and shareholders’ equity of $6,144 million. Total debt increased $1,628 million from the prior-year period. The company's net total debt to adjusted EBITDA ratio jumped to 2.37 compared with 2.11 in the year-ago period. In the trailing four quarters, the company bought back $1.7 billion of shares and paid $448 million in dividends.
Management projects capital expenditures — excluding mergers, acquisitions and purchases of leased facilities — for fiscal 2017 in the range of $3-$3.3 billion.
We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. However, intensifying price war among grocery stores to lure budget-constrained consumers poses concern.
Kroger, which operates 2,793 retail food stores, holds a Zacks Rank #4 (Sell). Better-ranked stock includes Ingredion Incorporated INGR having a long-term earnings growth rate of 11% with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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