Kroger, an operator of the largest chain of supermarkets and convenience stores in the United States, issued strong Q3 financials. Total sales grew 11.2% y-o-y to $24.99 bn and surpassed consensus estimate. Management stated that excluding fuel center sales, sales rose 13.7%. Identical supermarket sales (stores that are open without expansion or relocation for five full quarters) excluding fuel center sales, increased 5.6% to $18.93 bn. Kroger now envisions identical supermarket sales (excluding fuel) growth of 4-5% for the fourth quarter. The acquisition of Harris Teeter also supported the top line. Operating income jumped 21.9% y-o-y to $651 mn, and operating margin expanded 20 basis points to 2.6%. Adjusted earnings per share surged 30.2% y-o-y to 69 cents and were well ahead of analysts’ forecast of 61 cents. During the quarter, Kroger bought back 600,000 shares for an aggregate amount of USD 29 mn. A quarterly dividend was 18.5 cents per share, with indicated dividend yield of 1.2%. The company’s free cash flow generating ability has facilitated it to return over $1.8 bn to stakeholders via dividends and share repurchases in the last four quarters. Solid Q3 results prompted management to raise its earnings guidance. Kroger now projects full-2014 adjusted earnings to be $3.32-3.36 per share, up from the earlier provided range of $3.22-3.28. In long term, the company’s adjusted EPS annual growth rate guidance is 8-11%. Kroger currently operates 2,631 supermarkets and multi-department stores in 34 states and the District of Columbia under 24 local banners. I believe that the company’s strong corporate and national brands will continue to help it gain customer loyalty, which in turn should support identical supermarket sales growth going forward. I recommend Kroger’s shares for medium-term investment, target price is $66. $KR, Kroger Company (The) / 1440