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Kroger Co. (NYSE: KR) stock rose 4% Thursday after the company reported better-than-expected quarterly earnings. Kroger, the largest supermarket operator in the United States, beat analyst projections on earnings per share. Along with the Kroger earnings report, the company raised its full-year earnings forecast as well.
Kroger’s successful quarter continues a great year for the company. The Kroger earnings release reflected the company’s growing sales and earnings. The stock has returned 30% to investors this year, including dividends. Kroger maintains a long track record of sales growth each quarter, buys back a lot of stock, and recently made a significant acquisition to drive future growth.
Here’s why Kroger is arguably the best pick in its peer group for growth investors.
Kroger Earnings Highlight Growth
Comparable sales, a key figure for retailers that measures sales growth at locations open at least one year, rose 5.4% excluding fuel. This solidly beat expectations of a 4.5% increase. Last quarter marked the 48th in a row in which Kroger reported an increase in comparable-store sales excluding fuel. Overall, total sales rose 0.4%.
Sales growth was accompanied by significant cost cuts. Total operating expenses as a percentage of sales fell by 23 basis points last quarter.
The combination of higher sales and lower expenses helped significantly boost profitability. Kroger’s earnings per share grew 18% year over year, to $0.43 per share. Analysts expected earnings of just $0.39 per share, according to estimates compiled by Thomson Reuters, so this was a solid beat.
There should be even further growth in store for Kroger. Comparable sales will likely continue rising, thanks to its booming organics business. And, its recent acquisition of Roundy’s (NASDAQ: RNDY), which operates the highly successful Mariano’s brand, should add to growth as well.
Why Kroger Has More Growth in Store
The Roundy’s acquisition provides Kroger with 151 stores, including 34 Mariano’s locations in Chicago. Roundy’s shareholders will receive $3.60 per share. Kroger’s got Roundy’s for a compelling price. Just one year ago, Roundy’s shares fetched over $10 apiece.
Roundy’s fell onto hard times recently as its poorly-performing segments, namely the Pick ‘n Save, Copps and Metro Market banners. The company did a good job of aggressively expanding the prized Mariano’s banner, but this saddled the company with a lot of debt. And, Mariano’s still represents a relatively small fraction of Roundy’s store count, in comparison to its other banners.
Kroger has the financial heft to buy out Roundy’s, refinance its debt, and complete the merger without endangering its credit rating. There should also be an opportunity to cut costs. Kroger expects $40 million in cost synergies over time. Thanks to the sales potential and likely cost synergies, Kroger expects the deal to be accretive to earnings in the first year after closing.
Kroger’s growth strategy appears to be working. Kroger management raised its full-year forecast when it announced quarterly earnings. Kroger now sees earnings per share in a range of $2.02 per share to $2.04 per share, up from $1.92 to $1.98 per share previously.
Shareholders Are Cashing In
Kroger has rewarded its investors with compelling stock price gains, and the company returns cash to its shareholders as well. Over the past four quarters, the company returned $1.1 billion in share buybacks and dividends.
Kroger isn’t the cheapest stock. It trades for 20 times earnings, a premium to its peer group. And, the dividend yield clocks in barely above 1%, which is about half the average yield in the S&P 500 Index. But Kroger has a habit of beating expectations each quarter, and investors appear willing to pay a premium for that growth.
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