On the money: Kroger looks to invest in store expansion, new markets

By Michelle Russell | 8 March 2013

The store investment, Kroger said, would be funded with a 2013 capex allocation of US$2.1 to $2.4bn

The store investment, Kroger said, would be funded with a 2013 capex allocation of US$2.1 to $2.4bn

US retailer Kroger has said it will invest in expansion and look at new market opportunities in 2013 after delivering an "outstanding" year of sales and earnings.

Speaking on the firm's earnings call yesterday (7 March), Kroger CFO Michael Schlotman told analysts the retailer will look to open more stores and undertake new relocations and expansions in 2013 compared to last year.

COO Rodney McMullen added: "We are implementing our long-term growth strategy, which includes targeting capital to grow our business in new and existing markets."

The store investment, Kroger said, would be funded with a 2013 capex of US$2.1 to $2.4bn. This, the retailer said in a filing yesterday, will include around 45-50 "major" projects covering new stores, expansions and relocations, 130 to 160 remodels, and other investments including technology and infrastructure to support its business strategy.

The retailer has been working to fend off growing competition from big-box retailers, drug stores and dollar stores that are expanding their grocery sections. In a bid to build customer loyalty, Kroger has been focusing on improving the in-store experience, offering discount programmes and upgrading and expanding its offerings.

Of the store openings, Schlotman said the additional numbers may not be realised until 2014. "As we're increasing our capital spend to focus on existing and some new fill-in markets as well as exploring new markets, it takes a while for those stores to open. So we'll be spending dollars in 2013 that wind up being 2014 store openings. So the growth in that store count takes a while because the spending happens so far in advance of that. So it'll be a slow growth or a slow build into the higher store count."

Asked about acquisition opportunities, CEO David Dillon was evasive. "We don't generally comment. What we've tried to do is share with you our philosophy how we approach that, and that really hasn't changed at all from the past."

He commented, however, on the operating environment, which he characterised as remaining "a hotly contested market, a very competitive kind of a business".

"That's the nature of our business. But I see people making rational choices. I don't see it as performing irrationally, which is a good thing in our minds."

Kroger yesterday reported earnings totalling $1.5bn compared to $602.1m last year and said it exceeded the high end of its fiscal 2012 earnings per diluted share guidance by $0.07.

Dillon told analysts the company had "an outstanding year".

"We accomplished a lot in fiscal 2012. We delivered on ID sales growth, we exceeded expected earnings per share growth, we increased FIFO operating margin and we increased our dividend 30%.

"We're very pleased with our financial results. We grew our business in 2012 and building on that momentum, we expect to deliver the growth in 2013 that we outlined at our investor meeting in October."

Kroger said it expects fiscal 2013 EPS in the range of $2.71 to $2.79 and identical supermarket sales growth, excluding fuel, of around 2.5% to 3.5%.

Janney analyst Jonathan Feeney said Kroger's strategy is working, despite the competitive threats it is facing.

"Kroger is making progress on all four of its keys: positive ID sales, increased FIFO operating margin, ROIC, and market share," he said.

Feeney added: "Kroger's strong balance sheet should provide plenty of dry powder for accelerated capital investments and share repurchase as top priorities for cash flow."

Sectors: Financials, Retail

Companies: Kroger

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