Deutsche Bank Markets Research

Rating Company
Date

Buy
North America

Kroger Co. Alert

29 November 2012

Forecast Change
Price at 28 Nov 2012 (USD) Price Target 25.06 28.00 25.36 - 21.11

United States
Consumer

Retailing / Food & Drug Chains

Reuters KR.N

Bloomberg KR UN

Exchange Ticker NYS KR

52-week range

Cincy Strong: Another Solid Print, Stay Buy

KR reported a strong 3Q, with EPS coming in above expectations, driven by positive IDs and a better-than-expected core FIFO GPM, which indicates that KR remains disciplined in balancing price investments with comp growth. KR also raised FY12 EPS guidance by $0.06-$0.07/shr. Consistent with what we heard at the Analyst Day last month, KR continues to drive tonnage growth and share gains, leading to margin expansion. This, along with buybacks, is contributing to solid EPS growth a rarity for traditional grocers today. KRs competitive advantages are becoming increasingly evident (e.g., large scale, strong local market shares, consumer database/dunnhumby partnership, etc), and with the stock at 9.5x FY13 EPS est, there is still upside. Buy. 3 Key takes: Key Take #1: Bottom-Line: 3Q = Strong + High-Quality Print KR reported 3Q EPS of $0.46, ex-items, (+38% YOY), which was $0.04 above our $0.42 est. and $0.03 above the Street. Net, it was another solid, highquality print, as the beat was driven by: (1) Core (non-fuel) FIFO GPM fell 28 bps vs. our -43 bps est (+$0.032/shr vs. our model); (2) Sales were up +5.9% YOY vs. our +3.6% est (+$0.012/shr), helped by a solid +3.2% comp vs. our +3.0% est. Offsets included: (1) higher-than-expected SG&A margins (ex-items) of -40 bps vs. our -44 bps est (-$0.011/shr) and (2) slightly higher D&A of -6 bps vs. our -9 bps est (-$0.008/shr). Below-the-line items were a slight benefit: (1) taxes were 35.5% vs. our 36.5% est (+$0.009/shr) and (2) a lower share count (521.5M vs. our 525.3M est. (+$0.004/shr). Note that a lower-thanexpected LIFO charge ($15.5M vs. our $30.0M est) helped EPS by +$0.02/shr. Key Take #2: Key Positives: Core Business Strong; Guidance Raised We see 4 key positives from the 3Q print: (1) EPS beat Consensus by $0.03, driven by strength in the core business; (2) +3.2% non-fuel IDs were in line w/ the Street and expanded for the 36th consecutive quarter; (3) KR reported outstanding tonnage growth, indicating share gains continue; and (4) KR raised guidance by $0.06 - $0.07 at the mid-point to a range of $2.44-$2.46, from $2.35-$2.42 previously (Street at $2.42). Net, the combination of solid non-fuel IDs and better-than-expected core FIFO GPM performance indicates that KR continue to execute very well on its Customer First Strategy. Key Take #3: Raising our Estimates; New Price Target = $28 Our new FY12 EPS est. is $2.46 (+23% YOY), up from $2.42 previously. Our new FY13 EPS est. is $2.68 (+9% YOY), up from $2.65. We are also revising our PT from $27 to $28, which is based on 10.5x FY13 EPS est (multiple is consistent with our EPS growth outlook). Key downside risks include growing competition from non-traditional grocery competitors, or a sharp decline in food inflation, which could slow comps and impact margins.

Charles Grom, CFA, CPA Research Analyst (+1) 212 250-9525 charles.grom@db.com Shane Higgins Matt Siler, CFA

Associate Analyst Research Associate (+1) 212 250-6620 (+1) 212 250-1724 shane.higgins@db.com matthew.siler@db.com Paul Trussell, CFA Research Analyst (+1) 212 250-8343 paul.trussell@db.com

Key changes Target Price EPS (USD) Revenue (USDm) 27.00 to 28.00 2.42 to 2.46 96,807 to 96,547 3.7% 1.7% -0.3%

Stock & option liquidity data Market Cap (USD) Shares outstanding (m) Free float (%) Volume (28 Nov 2012) Option volume (und. shrs., 1M avg.) Key data FYE 1/30 1Q EPS 2Q EPS 3Q EPS 4Q EPS FY EPS (USD) P/E (x) 2012A 0.70 0.46 0.33 0.50 2.00 11.8 2013E 0.78A 0.52A 0.46A 0.70 2.46 10.2 2014E 2.68 9.3 13,402.1 534.8 100 1,352,759 161,680

* Includes the impact of FAS123R requiring the expensing of stock options.

________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.THE VIEWS EXPRESSED ABOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COMPANY(IES) AND ITS(THEIR) SECURITIES. THEY HAVE NOT AND WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=KR.N MICA(P) 072/04/2012.