National grocery chain Kroger (KR 0.64%) is making a habit out of beating earnings expectations. The company announced this morning that revenue for its fiscal second quarter rose 12% year over year to $25 billion while profit jumped 17% to reach $0.70 a share. Wall Street had been looking for weaker sales and profit growth of 10% and 15%, respectively. The stock rose slightly on the news in early trading.
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Kroger's 43rd consecutive quarter of comparable-store sales growth also significantly outperformed competitors. Comps grew 4.8% over the prior-year period, which was a slight improvement from the previous quarter's 4.6%. It also stands in contrast to rivals that are struggling to find any growth in a tough retailing environment. Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), for example, recently posted zero quarterly comps. Costco (NASDAQ: COST), with its 7% improvement last quarter, seems to the only major retailer beating Kroger by that key metric right now.
CEO Rodney McMullen said in a press release accompanying the earnings results that Kroger's overall strategy is resonating with shoppers. "We are winning with customers because we offer a full range of advantages including a great overall shopping experience, excellent customer service, a complete assortment of both national and corporate brand products, and everyday low prices and promotional offerings," he said.
Consistent with the previous quarter's results, the company's 2013 purchase of Harris Teeter boosted sales growth. However, it has also lifted Kroger's debt to an uncomfortably high level. That's why management is stepping back from share repurchases for the time being as it focuses on paying down the new debt it took on to fund its Harris Teeter purchase. Investors can see evidence of that move in today's results: Kroger spent just $78 million on share buybacks in the latest quarter, compared to $1.1 billion in the preceding three-month period.
Still, the good news far outweighs the bad in this report. For example, management raised guidance on profit and sales growth for the second time this year. Comps are now expected to improve up to 4.25% for the full year, while earnings should come in at $3.25 per share. Kroger started out 2014 targeting 3% comps growth and earnings per share of $3.19.
Foolish takeaway
McMullen told investors in July that Kroger's customers were getting less cautious in their spending. "We are seeing strong positive indicators in shopping behavior," he said at the time. The latest results are more evidence of that encouraging shift in spending attitudes. And the fact that Kroger is consistently outpacing the industry suggests the stock has room to grow, even with its 30% gain so far on the year.
