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Supermarket chain Kroger (NYSE: KR) rang up another strong quarter of growth when it reported earnings on Friday. Kroger stock rose as much as 5% in early market trading after releasing its results, continuing a very strong performance over the past few years.
Strong growth quarter after quarter is becoming a habit for Kroger, the biggest supermarket operator in the United States. The share price has reflected its success, rising 89% in the past two years. By comparison, the S&P 500 Index is up just 15% in the same period.
Here are the secrets to Kroger’s success.
Classic Beat-and-Raise
Kroger’s results easily beat analyst expectations. The company earned $0.44 per share last quarter, up 25% year over year. Analysts expected just $0.39 per share in profit. Comparable-store sales, which measures sales at locations open at least one year, rose 5.3%, again topping expectations of 4.7%. Last quarter represented the 47th in a row of comparable-store sales growth for Kroger.
The Kroger earnings report showed the grocery chain’s margins expanded as well. Operating expenses as a percentage of total sales fell by 35 basis points last quarter, year over year. As Kroger’s sales increase and its costs decrease, the company is generating excellent returns on capital. Return on invested capital reached 14.2% for the previous four quarters.
In addition, Kroger lifted its forecast for the remainder of the year. The company now expects to earn $1.92 to $1.98 per share, up from prior expectations of $1.90 to $1.95 per share. Once again, comparable-store sales are expected to fuel Kroger’s earnings growth. The company said it now expects comparable sales growth, excluding fuel, of 4% to 5%, compared with its previous forecast of 3.5% to 4.5%.
Kroger Heeds Customer Wants
At the heart of Kroger’s success is its willingness to learn what customers want and adapt to changing consumer preferences. For example, Kroger strictly abides by what management refers to as its “Customer First” strategy of offering low prices, high-quality products and top-tier service by making the customer its highest priority.
Kroger excels right now in the segment of natural and organic foods. The boom in the health and wellness trends has not taken Kroger by surprise. In fact, Kroger has established a large number of organic and natural brands at low Kroger prices.
This has worked wonders for the company. Last quarter, Kroger again experienced double-digit comparable sales growth in its natural foods department.
Giving Shareholders What They Want
Not only does Kroger keep a laser-like focus on what its customers want, but it’s also tuned in to what shareholders want. With its rising profits and cash flow, Kroger aggressively returns cash to shareholders through both dividends and share repurchases.
Earlier this year, Kroger raised its dividend by a strong 13.5%, bringing the annualized dividend to $0.42 per share. Over the past five years, Kroger has increased its dividend by 17% per year compounded annually. At its Sept. 10 closing price, Kroger offered a 1.1% yield.
Kroger’s strong financial results allowed the company to return more than $1.0 billion to shareholders through share buybacks and dividends over the last four quarters. In the second quarter, Kroger repurchased 1.1 million of its own shares.
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