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Kroger could talk deals along with earnings

Supermarket giant Kroger is gaining market share in several regions through acquisitions like Harris Teeter and more recently Roundy's, as well as by beating back Wal-Mart. Now there's new noise around another possible deal that could grow Kroger's grocery business, particularly in Florida.

Reuters has reported that Cincinnati-based Kroger is a potential bidder for the Fresh Market chain. Fresh Market, which has struggled amid increasing natural and organic grocery competition, put itself in play last fall when it announced it had retained JPMorgan as its financial advisor to explore various options.

On Thursday, Kroger is scheduled to report fourth-quarter earnings before the market opens. Investors will be looking for an update on its acquisition of Midwest regional grocer Roundy's, an $800 million deal completed in December. They also will be looking to gauge interest from management in other possible M&A in the grocery space, including for Fresh Market.

Kroger operates stores under such names as Kroger, Ralph's, Dillons, Food 4 Less, QFC, Fred Meyer, Fry's, Harris Teeter, City Market and Smith's.

A shopper outside a Kroger supermarket in Peoria, Illinois.
Daniel Acker | Bloomberg | Getty Images
A shopper outside a Kroger supermarket in Peoria, Illinois.

"I don't expect them to talk at length about it," said Wells Fargo Securities analyst Zachary Fadem. "But you know it is something to keep an eye out for."

Fresh Market operates about 180 stores in 27 states. It has some locations along the East Coast and in the Midwest, but the bulk of its store base is in the Southeast, particularly Florida and its home state of North Carolina. Florida grocery stores may be attractive to Kroger given it currently has a relatively small presence there today

Kroger and Fresh Market declined comment for this story.

Another key item on the conference call will be the impact of food deflation, particularly to the top line and margins. That said, some suggest that deflation fears for Kroger may be over-hyped after rival grocers SuperValu and Wal-Mart both commented on it as significant headwinds.

"Deflation in some categories was expected and that's happened," said Deutsche Bank analyst Karen Short. "It's not necessarily a negative, although some may view it as negative."

Kroger stock has outperformed the broad market over the last year, with a gain of 14 percent through Tuesday. Clarity on fiscal 2016 annual guidance could calm some worries and lift the shares but Fadem cautions: "I don't expect heroic guidance since Kroger tends to be conservative."

Analysts polled by Thomson Reuters are forecasting earnings of 54 cents per share for the November-January quarter, compared to 52 cents a share the company earned in the year-earlier period. Revenue is projected to increase 4 percent to $26.2 billion.

According to analysts, Kroger is likely to gain more market share momentum this year following Wal-Mart's announcement in January that it was closing 154 U.S. stores.

"Kroger is gaining share across nearly all regions and in all markets against Wal-Mart," RBC Capital Markets analyst William Kirk told clients in a note Tuesday. However, he believes this will be harder for Kroger to maintain as time goes by for a number of reasons, including as other competitors enter its markets.

Another topic that might come up on the conference call with analysts is its new store format initiatives, including the opening last month of its first Main & Vine store featuring a farmers market-style look, wine/beer bar and local food focus.

Besides grocery retail locations, Kroger also owns multi-department stores, convenience stores with gas and more than 320 fine jewelry outlets. Kroger's fuel margins in the third quarter of fiscal 2016 were higher than a year ago but during the company's December earnings call with analysts management indicated they expected the fourth quarter would bring "a moderation in margins."