Jefferies Raises Estimates on Kroger (KR)

Jefferies & Co. is out with an analyst note this morning, where they reiterate their Buy rating on shares of Kroger KR; they have a $28.50 price target on the stock. Jefferies analysts adjusted their FY 2011 numbers higher today, but left their $1.83 annual number unchanged. They said, “We saw considerable upside in 1Q but slightly trimmed our ID sales and OG&A leverage assumptions for the rest of the year. We now expect ex-fuel IDs of +3.0% vs. +3.7% previously, and OG&A improvement of 43 bps compared to 68 bps previously. Gross margins, however, may come in a little stronger than we thought based on current trends. This is especially true if an employment-based recovery leads to sales growth and broad trade-up activity as there is significant leverage in the model. Every 5 bp of gross margin improvement equals about $0.04-$0.05 in annual EPS.” They also noted, “Kroger is seeing less impact from stepped-up Wal-Mart WMT promotional activity than some feared. Indeed, the 55 bps of sequential improvement in selling gross margin change (-71 bps of contraction vs. -126 bps in 4Q) demonstrates that the company is trying to better balance market share gains, price and shareholder returns. Nevertheless, the risk of WMT's aggressive promotional activity hurting sales, margins or both remains front and center given the sluggish economic climate. Indeed, to truly realize the full earnings potential in the back half of 2010, we believe the job market will need to see meaningful improvement over the next several months.” Jefferies analysts quickly added, “We see significant equity appreciation if the economic climate improves.”