Shares of behemoth food retailer Kroger Co. (NYSE: KR) rose more than 1% on June 18 after the company posted better-than-expected quarterly results and lifted its forecast for the remainder of the year.
Kroger, the biggest U.S. grocery chain, owns the Ralphs, Smith’s, and Food-4-Less grocery chains, as well as its namesake Kroger supermarkets.
In all, Kroger said its net profit rose to $619 million, or $1.25 per share, in the first quarter, up from $501 million, or 98 cents per share, in the same period a year earlier. On a percentage basis, Kroger’s earnings per share jumped 27% year-over-year.
Kroger’s earnings results beat analyst expectations, which the company has a habit of doing. It has beaten analysts’ forecasts by an average of 8% over the past four quarters.
Role of Cost Cuts
Kroger benefited from two key things last quarter. One was a meaningful reduction in costs. Total operating expenses, as a percentage of sales, fell 15 basis points last quarter, year over year.
A contributor to Kroger’s lower expenses could be the cost of milk, which has declined significantly in recent months. U.S. raw milk prices fell 32% on average from February-April, due to lower demand from China, as well as Russia’s ban on U.S. milk and dairy imports.
The other major factor in Kroger’s beat was stronger-than-expected same-store sales, which measures sales at locations open at least one year. Same-store sales, excluding fuel, rose 5.7%, beating the 4.4% growth anticipated by analysts.
Kroger has a long streak of success, with an industry-leading 46 consecutive quarters of same-store sales growth. Looking back, Kroger has implemented a number of initiatives that have helped the company over the long term.
Kroger has achieved a long streak of strong results thanks to what management refers to as its “Customer First”strategy: low prices, high-quality product offerings and top-tier service by making the customer its highest priority.
Another wise strategy has been the rapid adoption of digital capabilities. Kroger has pushed hard to increase its technology and digital offerings to customers. That includes ClickList, its online ordering and customer-pickup service.
Consumers With More Cash
It seems the big tailwind working in Kroger’s favor last quarter was lower fuel prices. The price of oil is down by about 40% since the 2014 high point. This has been a big boost to consumers, who now have more disposable income since they’re spending less at the pump. With the savings, it appears many consumers have more cash to buy groceries.
Kroger’s performance was extremely impressive. Such high earnings growth is rare for a supermarket operator, where margins are thin and competition is intense.
Along with the quarterly results, Kroger boosted its full-year forecast for same-store sales. Management now expects same-supermarket sales to increase by 3.5% to 4.5% this fiscal year. The company had previously expected sales to increase by 3% to 4%.
Kroger stock has had a very impressive run. Shares are up 47% over the past year, and 122% in the past two years. The only qualm an investor could have about Kroger at this point is its valuation. After such huge gains, the stock now trades for 21 times earnings.
That is a lofty level for a large retailer. Kroger’s valuation is significantly higher than many of its peers, like Wal-Mart (NYSE: WMT), which trades for a more modest 14 times EPS.
However, if Kroger keeps growing, there’s no reason the stock can’t continue to perform well. The company has a habit of consistently growing, and routinely beats analyst expectations each quarter. If that trend continues, Kroger’s stock can still do well going forward.
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