Were Solid Kroger Q3 Earnings Hit by Coming Q4 Charge?

Kroger Co. (NYSE: KR) reported fiscal third-quarter 2020 results before markets opened Thursday. The supermarket giant posted adjusted diluted net earnings per share (EPS) of $0.71 on total revenues of $29.7 billion. In the same period a year ago, the company reported EPS of $0.47 on total revenues of $28.0 billion. Third-quarter results also compare to the consensus estimates for EPS of $0.47 and $29.97 billion in revenues.

Same-store sales, excluding fuel sales, rose by 10.9% year over year to $26.9 billion, and gross margin rose to 23.0%.

Kroger repurchased shares worth $304 million under its $1 billion board authorization announced in September. For the year to date, the company has repurchased $989 million worth of shares in both prior and current authorizations.

The company also updated guidance for its 2020 fiscal year. Same-store sales now are expected to rise by about 14% (up from 13% previously) and adjusted EPS is forecast to rise to a range of $3.30 to $3.35. Adjusted free cash flow is pegged at $2.8 to $3.17 billion, and share buybacks for the year are expected to fall in a range of $1.1 billion to $1.3 billion.

Kroger’s operating, general and administrative expenses fell by 30 basis points, excluding fuel sales and adjustments. The company attributed the decline to price investments and mix changes, offset by sourcing efficiencies, sales leverage and growth in alternative profit streams.

Digital sales rose by 108% year over year. Regarding fiscal year 2021, CFO Gary Millerchip commented that the company believes that performance will be “stronger than we would have expected prior to the pandemic” on a two-year stacked basis (excluding fuel sales).

Kroger announced Monday that the company had reached an agreement with 20 local unions of the United Food and Commercial Workers (UFCW) to withdraw from the union pension fund, noting at the time that the agreement would not affect adjusted EPS for 2020. However, the company will take a fourth-quarter charge to net earnings during the fourth quarter, amounting to around $0.98 per diluted share on a GAAP basis.

The stock traded down about 5% early Thursday to $30.66, in a 52-week range of $26.25 to $37.22. The consensus 12-month price target is $36.30.

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