Update: Kroger sees 'strong' Q1, raises fiscal 2014 guidance

CINCINNATI — Starting off the year with a strong momentum, Kroger posted a 9% increase in first quarter sales, which marked the first period that includes Harris Teeter in the statement of operations. Based on its strong quarter, the company has raised its fiscal 2014 guidance.

Total sales increased 9.9% to $32.96 billion in the first quarter compared with $30 billion for the same period last year. Total sales, excluding fuel, increased 11.4% in the first quarter over the same period last year. 

Net earnings, including charges related to pension obligations, totaled $501 million, or 98 cents per diluted share, and identical supermarket sales growth, without fuel, of 4.6% in the first quarter of fiscal year 2014. 

When discussing identical sales for the quarter, the company noted that in pharmacy they continued to see “strong performance both from a script count and a sales basis.” Specific details were not disclosed.

Excluding charges, Kroger's adjusted net earnings were $557 million, or $1.09 per diluted share, for the first quarter.  Net earnings in the same period last year were $481 million, or $0.92 per diluted share.

"Kroger associates continue to enhance our connection with all customers and achieve our key performance measures, which are allowing us to achieve our growth strategy and create shareholder value," stated Rodney McMullen, Kroger's CEO. "Our strong first quarter results set us up to deliver a 12% to 15% net earnings growth rate for the year, partly due to the benefit of Harris Teeter, compared to our long-term growth rate of 8% to 11% plus the growing dividend. We are pleased to start the year with growth momentum while also returning $1.1 billion in cash back to shareholders this quarter through our buyback program."

During a call with analysts Thursday morning to discuss results, McMullen said that the company is seeing a rebound in consumer confidence as the economy shows signs of improvement.

“We are seeing strong, positive indicators in shopping behavior. Our customers have exhibited less cautious spending behavior, for example. Consistent with rise in consumer confidence index in May, our own customer research tells us that more customers perceive the economy to be in recovery,” McMullen told analysts. “While it is obviously welcomed news, the recovery remains fragile, especially for customers on a budget.”

The company stated that its strong financial position allowed it to return more than $1.9 billion to shareholders through share buybacks and dividends over the last four quarters. During the first quarter, Kroger repurchased 25.7 million common shares for a total investment of $1.1 billion. This was contemplated in the company's original guidance.

Based on the first quarter results, the company raised and narrowed its adjusted net earnings guidance to a range of $3.19 to $3.27 per diluted share for fiscal 2014. The original guidance was $3.14 to $3.25 per diluted share. The company's long-term net earnings per diluted share growth rate guidance is 8% to 11%, plus a growing dividend.  Kroger raised its identical supermarket sales growth guidance, excluding fuel, to 3.0% to 4.0% for fiscal 2014.  The original guidance was 2.5% to 3.5%.

In January, Kroger completed its merger with Harris Teeter. The transaction enabled Kroger to expand with the Harris Teeter brand and a base of 227 stores in the Southeastern and mid-Atlantic markets and in Washington, D.C. Harris Teeter continues to operate its stores under the Harris Teeter brand name as a subsidiary of Kroger. Harris Teeter had revenues of $4.7 billion for fiscal year 2013. According to Kroger, the company operates retail pharmacies in 1,947 of its food stores. The merger with Harris Teeter brought an additional 159 pharmacies to the Kroger portfolio.

During Thursday’s conference call, Michael Ellis, president and COO, said that the company’s merger with Harris Teeter is “going extremely well.”

“We are spending a lot of time with Harris Teeter and learning about how they connect with customers. Their store standards in fresh foods are world-class and our cultures are a great fit, which makes our integration rather easy. We are excited about what we are learning about Harris Teeter’s online ordering and store pick-up model; it is a program with a lot of promise,” Ellis said.

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