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How Might Kroger’s Performance Shape up in Fiscal 2017?

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Kroger beat earnings estimate in fiscal 4Q16—yet again

Despite its slowdown in comparable same-store sales, or comps, Kroger (KR) recorded a 9.6% YoY (year-over-year) increase in EPS (earnings per share) in fiscal 4Q16, reaching 57 cents per share, as compared to the consensus estimate of 54 cents per share. According to the company’s management, the fuel segment’s contribution to EPS declined by only half as much in 4Q16 as it did one year previously. Earnings were helped by a lower-than-expected tax rate and from an unexpected LIFO credit.

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Looking forward in fiscal 2017

Kroger’s management has guided its full fiscal 2017 net earnings to $2.19–$2.28 per diluted share. The company’s management is expecting its core business to grow in line with its long-term net EPS growth rate of 8%–11%.

In fiscal 1Q17, Kroger is expected to see earnings in the middle to high end of its long-term EPS growth range, while its fiscal 2Q17 EPS is likely to fall short of that range. Fiscal 3Q17 and fiscal 4Q17 should see EPS growth in the 8%–11% range.

In terms of comps, Kroger’s management has guided a further slowdown, expecting comps to fall in the 2.5%–3.5% range in fiscal 2017. This lower guidance is based on the company’s expectation of a lower inflationary environment and the dampening effect of 40–50 bps from the Roundy’s acquisition.

Kroger’s initiatives

Kroger has a strong track record of growing sales through various initiatives, such as tweaking store formats, introducing new products, and adding technology. In fiscal 2017, the company is planning to expand its already strong Simple Truth line by introducing Simple Truth household, personal care, and baby products. According to a report by J.P. Morgan, Kroger could surpass Whole Foods Market (WFM) within the next two years and become the top seller of organic and natural foods in the US.

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Kroger is also working on its new community-focused grocery store concept called Main & Vine. Main & Vine stores would offer local, specialty, and everyday products at competitive prices. These stores will follow the small-box format, with an average store size of 22,000–30,000 square feet—much smaller than Kroger’s combination stores, which are about 76,000 square feet. By comparison, Fred Meyer stores have an average store size of 161,000 square feet.

Investors looking for exposure to Kroger (KR) through ETFs can invest in the SPDR Consumer Staples Select Sector ETF (XLP). KR makes up 2.1% of XLP, which tracks the Consumer Staples Select Sector Index and invests at least 95% of its portfolio in the index securities. XLP has 5.8%, 3.7%, and 0.6% of its investments in Wal-Mart Stores (WMT), Costco Wholesale (COST), and Whole Foods Market (WFM), respectively.

In the next and final part, we’ll look at Kroger’s valuations.

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