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Category: Stock Market and Kroger Company
Date: 12 September 2019 Stock Price: $25.57 We take a look at the 2nd quarter earnings release of their 2019 fiscal year of Kroger one of the world's largest retail companies, with annual sales topping $120 billion.
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About The Kroger Company
With nearly 2,800 stores in 35 states under two dozen banners and annual sales of more than $121.1 billion, Kroger today ranks as one of the world’s largest retailers.
Mergers have played a key role in Kroger’s growth over the years. In 1983, 100 years after the company’s founding, Kroger merged with Dillon Companies Inc. in Kansas to become a coast-to-coast operator of food, drug and convenience stores.
The biggest merger in Kroger’s history came in 1999, when the company teamed up with Fred Meyer, Inc. in a $13 billion deal that created a supermarket chain with the broadest geographic coverage and widest variety of formats in the food retailing industry. The merger also enabled Kroger to generate huge economies of scale in purchasing, manufacturing, information systems and logistics. In an era when many larger mergers failed, the success of the Kroger-Fred Meyer merger stands out.
In 2014, Kroger finalized its merger with Harris Teeter, a regional chain of more than 200 stores. This merger brought to Kroger an exceptional brand and complementary base of stores in high-growth markets, primarily in the Mid-Atlantic region and the District of Columbia. Later that year, Kroger merged with Vitacost.com, one of the largest pure e-commerce companies in the nutrition and healthy living market. The company’s e-commerce platform accelerated Kroger’s entry into the e-commerce space by several years, bringing the ability to serve customers through ship-to-home orders, and expanding Kroger’s reach into all 50 states and internationally. Then in late 2015, Kroger merged with Roundy’s in Wisconsin, adding Pick ‘N Save, Metro Market and Mariano’s stores in Wisconsin and Illinois to the Kroger family.
Today Kroger offers a store format for nearly every kind of shopper. Our formats include supermarkets, multi-department stores, Marketplace stores, price-impact stores, and fine jewelry stores.
The image below shows a few of Kroger's business highlights as at the end of their 2018 fiscal year.
Mergers have played a key role in Kroger’s growth over the years. In 1983, 100 years after the company’s founding, Kroger merged with Dillon Companies Inc. in Kansas to become a coast-to-coast operator of food, drug and convenience stores.
The biggest merger in Kroger’s history came in 1999, when the company teamed up with Fred Meyer, Inc. in a $13 billion deal that created a supermarket chain with the broadest geographic coverage and widest variety of formats in the food retailing industry. The merger also enabled Kroger to generate huge economies of scale in purchasing, manufacturing, information systems and logistics. In an era when many larger mergers failed, the success of the Kroger-Fred Meyer merger stands out.
In 2014, Kroger finalized its merger with Harris Teeter, a regional chain of more than 200 stores. This merger brought to Kroger an exceptional brand and complementary base of stores in high-growth markets, primarily in the Mid-Atlantic region and the District of Columbia. Later that year, Kroger merged with Vitacost.com, one of the largest pure e-commerce companies in the nutrition and healthy living market. The company’s e-commerce platform accelerated Kroger’s entry into the e-commerce space by several years, bringing the ability to serve customers through ship-to-home orders, and expanding Kroger’s reach into all 50 states and internationally. Then in late 2015, Kroger merged with Roundy’s in Wisconsin, adding Pick ‘N Save, Metro Market and Mariano’s stores in Wisconsin and Illinois to the Kroger family.
Today Kroger offers a store format for nearly every kind of shopper. Our formats include supermarkets, multi-department stores, Marketplace stores, price-impact stores, and fine jewelry stores.
The image below shows a few of Kroger's business highlights as at the end of their 2018 fiscal year.
Financial overview of Kroger's latest earnings report
The numbers we are interested in (for the quarter):
- Sales: $28.168 billion (up from $28.014 billion from the same quarter of the previous year)
- Net income: $297 million (down from $508 million for the same quarter of the previous year)
- Diluted earnings per share: $0.37 (down from $0.62 for the same quarter of the previous year)
- PE ratio: 17.75 (assuming the earnings per share this quarter is repeated for all quarters of the fiscal year)
- Dividend declared for the quarter: $0.16 (up from $0.14 for the same quarter of the previous year)
- Dividend yield: 2.5% (assuming the dividend paid this quarter is repeated for all quarters of the fiscal year)
- Dividend yield: 2.5% (assuming the dividend paid this quarter is repeated for all quarters of the fiscal year)
- Diluted weighted-average shares outstanding: 805 million (unchanged from 805 million for the same quarter of the previous year)
- Cash and cash equivalents: $354 million
- Cash and cash equivalents per share: $0.44
- Cash and cash equivalents makes up 1.72% of Kroger's market capital
- Cash and cash equivalents makes up 0.79 % of Kroger's total assets
- Accounts receivable: $1.56 billion
- Accounts receivable makes up 3.51% of the Kroger's total assets.
- Inventories: $6.526 billion (up from $6.241 billion for the same quarter of the previous year)
- Inventories makes up 14.67% of Kroger's total assets
- Inventories grew by 4.57% over the last 12 months
- Stockholders equity: $8.65 billion
- Stockholders equity per share: $10.74
- The Kroger Company is trading at 2.37 times its stockholders equity per share
Kroger's management commentary on the results and earnings guidance
CINCINNATI, Sept. 12, 2019 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported its second quarter 2019 results and provided a Restock Kroger progress update on the company's three-year transformation plan.
Comments from Chairman and CEO Rodney McMullen
"The Restock Kroger framework is designed to reposition our core business by 2020 while continuing to deliver for shareholders.
We are pleased with the improvement of trends in our supermarket business in the second quarter. Guided by our customer obsession, Kroger delivered our best identical sales, without fuel, result since the launch of our transformation plan. FIFO gross margin, without fuel and pharmacy, was stable in our supermarket business. Gross margin headwinds in pharmacy were offset by strong fuel performance during the quarter. We continue to reduce costs and are on track to deliver $100 million in incremental operating profit through alternative profit stream growth. We delivered strong free cash flow and are now within our targeted net total debt to adjusted EBITDA range.
Kroger is laser-focused on executing against our 2019 plans and realizing our vision of serving America through food inspiration and uplift."
Total company sales were $28.2 billion in the second quarter, compared to $28.0 billion for the same period last year. Excluding fuel, dispositions and merger transactions, sales grew 2.5%. Gross margin was 21.9% of sales for the second quarter. The FIFO gross margin rate, excluding fuel, decrease of 29 basis points was primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross profit excluding fuel and retail pharmacy saw 12 basis points of gross margin investment. LIFO charge for the quarter was $30 million, compared to $12 million for the same period last year, driven by higher than expected inflation in dry grocery, pharmacy and dairy.
The Operating, General & Administrative rate decrease of 14 basis points is due to execution of Restock Kroger initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions. During the quarter, Kroger accepted a substantial offer to sell an unused warehouse that had been on the market for some time. Kroger used this gain as an opportunity to contribute a similar amount into the UFCW company pension plan, helping stabilize associates' future benefits. The net impact of these transactions to EPS growth was neutral.
Financial Strategy
Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals. Consistent with its financial strategy, Kroger reduced net total debt by $1.3 billion over the last four quarters. Kroger's net total debt to adjusted EBITDA ratio is 2.46, compared to 2.59 a year ago (see Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. Earlier this year, Kroger increased the dividend by 14 percent, marking the 13th consecutive year of dividend increases.
Fiscal guidance for 2019
Comments from Chairman and CEO Rodney McMullen
"The Restock Kroger framework is designed to reposition our core business by 2020 while continuing to deliver for shareholders.
We are pleased with the improvement of trends in our supermarket business in the second quarter. Guided by our customer obsession, Kroger delivered our best identical sales, without fuel, result since the launch of our transformation plan. FIFO gross margin, without fuel and pharmacy, was stable in our supermarket business. Gross margin headwinds in pharmacy were offset by strong fuel performance during the quarter. We continue to reduce costs and are on track to deliver $100 million in incremental operating profit through alternative profit stream growth. We delivered strong free cash flow and are now within our targeted net total debt to adjusted EBITDA range.
Kroger is laser-focused on executing against our 2019 plans and realizing our vision of serving America through food inspiration and uplift."
Total company sales were $28.2 billion in the second quarter, compared to $28.0 billion for the same period last year. Excluding fuel, dispositions and merger transactions, sales grew 2.5%. Gross margin was 21.9% of sales for the second quarter. The FIFO gross margin rate, excluding fuel, decrease of 29 basis points was primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross profit excluding fuel and retail pharmacy saw 12 basis points of gross margin investment. LIFO charge for the quarter was $30 million, compared to $12 million for the same period last year, driven by higher than expected inflation in dry grocery, pharmacy and dairy.
The Operating, General & Administrative rate decrease of 14 basis points is due to execution of Restock Kroger initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions. During the quarter, Kroger accepted a substantial offer to sell an unused warehouse that had been on the market for some time. Kroger used this gain as an opportunity to contribute a similar amount into the UFCW company pension plan, helping stabilize associates' future benefits. The net impact of these transactions to EPS growth was neutral.
Financial Strategy
Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals. Consistent with its financial strategy, Kroger reduced net total debt by $1.3 billion over the last four quarters. Kroger's net total debt to adjusted EBITDA ratio is 2.46, compared to 2.59 a year ago (see Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. Earlier this year, Kroger increased the dividend by 14 percent, marking the 13th consecutive year of dividend increases.
Fiscal guidance for 2019
Second Quarter 2019 Restock Kroger Highlights
Redefine the Grocery Customer Experience
Redefine the Grocery Customer Experience
- Our Brands sales were up 3.1% vs. prior year. Kroger also launched 203 new Our Brands items
- Expanded to 1,780 Pickup locations and 2,225 Delivery locations, covering over 95% of Kroger households
- Launched Simple Truth Plant Based, a collection of fresh meatless burger patties and other products to appeal to growing number of customers exploring meat and dairy alternatives
- Announced first Agency of Record: DDB New York to develop a refreshed, stronger brand identity to drive trips and traffic
- 84.51° announced the launch of Stratum, a breakthrough analytics solution that combines rich customer behavior insights with retail performance measures
- Kroger Precision Marketing increased engagement to over 300 consumer packaged goods companies
- Announced expansion of Walgreens exploratory pilot into Knoxville, TN
- Named the location of an additional Kroger-Ocado customer fulfillment center in Georgia
- Record employee retention in one of the tightest labor markets in years
- Recognized on Way Up's Top 100 Corporate Internship list for second consecutive year for providing students exposure to various careers
- Feed Your Future, industry-leading education assistance program, continues to build momentum. Since inception of the program last year, the company has distributed 3,000 awards, totaling $5.1 million in education assistance
- Published annual Environmental, Social and Governance (ESG) report, available at sustainability.kroger.com
- Reduced food waste footprint in supermarkets by 9% last year, marking another measurable action to create a more sustainable future
- Announced inaugural cohort of the Innovation Fund, a program of The Kroger Co. Zero Hunger | Zero Waste Foundation
The Kroger Company (NYSE: KR) stock price history
The image below shows the stock price history of The Kroger Company over the last 5 years. And to be honest the stock price of The Kroger Company has basically moved sideways over the last 5 years. It's sitting at almost exactly the same price it did 5 years ago. The stock is also trading at close the midpoint between its 52 week high and its 52 week low, another indication that there is no clear momentum in the stock price and it seems to bob up and down aimlessly waiting for a catalyst to drive the stock price movement.
Recent coverage of The Kroger Company
The extract below touches on the latest news regarding Kroger Company as obtained from Zacks.
Kroger (KR - Free Report) came out with quarterly earnings of $0.44 per share, beating the Zacks Consensus Estimate of $0.41 per share. This compares to earnings of $0.41 per share a year ago. These figures are adjusted for non-recurring items. This quarterly report represents an earnings surprise of 7.32%. A quarter ago, it was expected that this supermarket chain would post earnings of $0.71 per share when it actually produced earnings of $0.72, delivering a surprise of 1.41%.
Over the last four quarters, the company has surpassed consensus EPS estimates three times. Kroger, which belongs to the Zacks Retail - Supermarkets industry, posted revenues of $28.17 billion for the quarter ended July 2019, missing the Zacks Consensus Estimate by 0.81%. This compares to year-ago revenues of $27.87 billion. The company has topped consensus revenue estimates three times over the last four quarters. The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.
Kroger shares have lost about 7% since the beginning of the year versus the S&P 500's gain of 19.7%.
Kroger (KR - Free Report) came out with quarterly earnings of $0.44 per share, beating the Zacks Consensus Estimate of $0.41 per share. This compares to earnings of $0.41 per share a year ago. These figures are adjusted for non-recurring items. This quarterly report represents an earnings surprise of 7.32%. A quarter ago, it was expected that this supermarket chain would post earnings of $0.71 per share when it actually produced earnings of $0.72, delivering a surprise of 1.41%.
Over the last four quarters, the company has surpassed consensus EPS estimates three times. Kroger, which belongs to the Zacks Retail - Supermarkets industry, posted revenues of $28.17 billion for the quarter ended July 2019, missing the Zacks Consensus Estimate by 0.81%. This compares to year-ago revenues of $27.87 billion. The company has topped consensus revenue estimates three times over the last four quarters. The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.
Kroger shares have lost about 7% since the beginning of the year versus the S&P 500's gain of 19.7%.
The Kroger Company (NYSE: KR) latest stock valuation
So what are The Kroger Company stock worth considering their latest earnings release? Based on the earnings released and the outlook provided our valuation models set a target (full value) price for The Kroger Company of $34.40 a stock. We therefore believe Kroger Company stock is undervalued and predict that the price will trend upwards to levels closer to our target (full value) price in coming weeks and months. We do believe the current price offers long term fundamental and value investors a good entry point into one of the worlds largest retail groups.