Kroger Earnings Preview: Further Expansion Coming?

Kroger (NYSE: KR) is scheduled to report its second-quarter 2011 results tomorrow, September 9, before the opening bell. The supermarket operator has managed to increase revenue despite the sputtering economy by offering loyalty card discounts, personalized coupons, and gas discounts to customers. And after the recent announcement of its acquisition of Schnuck's stores in the Memphis area, investors may also be looking for any indications of further expansion plans in the report.

Analysts on average predict that Kroger will report earnings of $0.43 per share, which is an increase over $0.41 in the same period of last year. That EPS estimate is unchanged from 60 days ago. And note that Kroger has not fallen short of consensus EPS expectations in the past six quarters.

The forecast also calls for the company to post revenues of $20.5 billion, which would be 9.2% higher than a year ago. Looking ahead to the current quarter, analysts thus far are looking for 8.6% year-over-year growth of revenues. And the forecast for the full year so far calls for revenues up 9.2% year over year with per-share earnings 10.7% higher.

The Company

Cincinnati-based Kroger is the nation's largest traditional grocery retailer. It operates more than 2,400 locations under such banners as Kroger, Fred Meyer and King Soopers. It also operates more than 1,000 fuel centers, as well as convenience stores, jewelry stores, and food processing plants. The company was founded in 1883, is an S&P 500 component and currently has a market cap of $14.2 billion.

During the three months that ended in July, the company appointed a chief diversity officer and new presidents of its Ralphs and Smith's divisions. It also launched Comforts for Baby, a website aimed at busy mothers.

Performance

The company has a long-term earnings per share growth forecast of 9.7%, a return of equity of 22.6% and a dividend yield of 1.8%. Its P/E and PEG ratios are lower than the industry averages. Cash flow from operations has grown in the past three reporting periods. And 14 of 20 analysts following the stock rate it a Buy or Strong Buy.

The share price has risen nearly 6% in the past month and is more than 15% higher than a year ago. The stock has outperformed competitors such as Safeway (NYSE: SWY), Supervalu (NYSE: SVU) and Walmart (NYSE: WMT), as well as the broader markets, year to date.

Action Items:

Bullish: Traders interested in exchange traded funds invested in Kroger might want to consider the following trades:

• SPDR S&P Retail (NYSE: XRT) is more than 28% higher than a year ago.
• Rydex S&P Equal Weight Consumer Staples (NYSE: RHS) is up more than 16% in the past year.

Bearish: Traders may want to consider these alternative positions:

• Costco Wholesale (NYSE: COST) is up almost 38% in the past year.
• Whole Foods Market (NYSE: WFM) is more than 90% higher than a year ago.

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