Summary
- Kroger was able to report top line growth of 11.20% as greater number of people shopped at Kroger, higher retention rate and upward revision in the prices of products.
- Operating profit margin went up by 29 basis points to reach 2.61% during the most recent quarter, up from 2.32% during the same period a year ago.
- According to a research report recently published by Retail ShopTopic, Kroger and Harris Teeter which are now one company, are planning to launch 35 new grocery stores.
- On a per share basis, this is expected to uplift the EPS by $0.04.
- The stock’s P/E based valuation represents a capital return potential of approximately 17.78%.
As one of the world's largest retailers with a big grocery chain, The Kroger Co. (NYSE:KR) serves the needs of its customers in 2,631 supermarkets and multi-department stores across 34 states under its various brands. According to the Harris Poll EquiTrend conducted this year, the company ranks fourth as the Midwest Region grocery store. The company's active focus on customer needs has resulted in positive brand equity. Despite the stifling operating environment for grocery stores, Kroger has been able to find a way out to register improved financial returns and creating higher value for its shareholders.
Source: Harris Poll EquiTrend
Recently, the company has declared the financial results for the third quarter of the fiscal year 2014. Let's take a look at the company's financial performance, the probability of persistence in these results and its future growth prospects.
Operational Performance Highlights
Top Line Growth
(click to enlarge)
Source: Kroger s SEC Filings 10-Q
Kroger was able to report double digit top line growth of 11.20% during the third quarter of the fiscal year 2014 when matched against the corresponding period in the prior year on the back of its merger with Harris Teeter. The primary driver of growth of 13.10% in total supermarket sales without fuel was the greater number of people shopping at Kroger's grocery stores, higher retention rate (i.e. more visits per household) and upward revision in the prices of products. Moreover, fuel sales had shot up by 1.1% as the number of fuel gallons dispatched increased by 5% which was partially offset by the drop in average retail fuel price of 3.7% following the plunge in the cost of fuel.
Operating Profit Status
Operating profit margin went up by 29 basis points to reach 2.61% during the most recent quarter, up from 2.32% during the same period a year ago. The increase in the operating margin was seen as the positive growth in the supermarket sales following the company's combination with Harris Teeter trickled down to the bottom coupled with productivity improvements, disciplined expense management and lower company sponsored benefit plan costs. This was partially counterbalanced by the company's investments in its customers i.e. by offering rebates and higher credit card fees and incentive plan costs. Moreover, Kroger also witnessed a jump in its earnings from fuel operations during the quarter under discussion mainly due to an increase of $0.06 in the average margin per gallon of fuel dispatched.
Future Network Expansion
According to a research report recently published by Retail ShopTopic, Kroger and Harris Teeter which are now one company are planning to launch 35 new grocery stores. Using the most recent quarter's financial results, I have derived revenue per store. Multiplying this figure with the new store openings and converting it to annual basis, additional revenue is calculated to be $1,329.60 million. Staying conservative and applying the net profit margin "ttm" of 1.53%, incremental earnings are projected to be $20.34 million due to the planned expansion. On a per share basis, this is expected to uplift the EPS by $0.04.
Final Call
On the premise of the company's right combination with Harris Teeter, the financial return growth expected from new store openings and higher productivity, I believe Kroger is well-positioned to deliver better financial performance in the upcoming periods.
From the valuation perspective, the company's investment status can be reaffirmed by conducting a quick P/E based valuation. Based on the industry's P/E "ttm" of 21.70 and consensus analyst EPS estimate for year ending January, 2015 of $3.39, the stock's intrinsic value is derived to be $73.56 whereas it is currently trading in the market for a price of $62.46. This represents a capital return potential of approximately 17.78%.
By:Chronic Bull
Source:http://seekingalpha.com/article/2771735-kroger-an-attractive-investment-candidate?uide=5990061&uprof=54
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