Tickers in this Article: KR, WMT, SVU, SWY, WFM
Kroger (NYSE:KR) bills itself as the largest traditional grocery store retailer in the United States. It reported fiscal first quarter results on Thursday that included robust sales and profit growth, but the longer-term outlook will likely be much more subdued. The company has many positive investment attributes, but its modest overall growth is a major drawback.

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First Quarter Recap
Total sales advanced 11% to $27.5 billion. Retail store sales, or excluding gasoline sales from total sales, improved a respectable 4.8% as same-store sales rose 4.7%. Management boasted that it has posted positive comparable store sales for 30 consecutive quarters or for more than 7 years straight.

Supermarket gross margins condensed slightly, falling seven basis points to demonstrate that Kroger is handling higher commodity and food costs well. Management was also able to keep operating, general and administrative costs in check and lower them 36 basis points from last year's first quarter to 15.76% of sales. As a result, the operating margin came in at 2.95% of sales and grew 12.2% to $811 million.

A gain due to a noncontrolling interest - likely due to the convenience stores, food processing plants, or jewelry stores it owns in addition to its supermarket locations - helped pushed net income ahead by 15.7% to $432.2 million. Share buybacks further boosted earnings per share growth to 20.7%. Earnings came in at $0.70 per diluted share.

Outlook
Management increased its full-year comp guidance and now projects comp growth between 3.5% and 4.5%. Analysts currently expect annual sales growth of more than 7% and total sales just north of $88 billion. The company's earnings guidance is currently in a range of $1.85 and $1.95 per diluted share. (For more on guidance, see Can Earnings Guidance Accurately Predict The Future?)

The Bottom Line
Kroger's earnings beat analyst projections and the stock rallied as much as 5% after the financial release. Despite the run up, the forward earnings valuation is still pretty reasonable at less than 13. Free cash flow trends have also been improving. Last year, free cash flow exceeded reported earnings and came in at $1.5 billion, or approximately $2.36 per diluted share. Kroger's dividend yield is also decent at 1.8%.

Overall, Kroger is an impressively steady performer and its operations are conservatively managed. The only drawback to the investment story is it isn't growing that fast. Over the past decade, average sales and profit growth has been only slightly more than 5% annually. Intense competition from peers that include Safeway (NYSE:SWY), Supervalu (NYSE:SVU), Wal-Mart (NYSE:WMT) on the low end of the market and Whole Foods Market, Inc. (NYSE:WFM) on the high end will likely keep future growth in check, though the stock does have obvious downside protection as food is a basic necessity and relatively recession-resistant. (For additional reading, also take a look at Analyzing Retail Stocks.)

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