The Kroger Company (KR - Analyst Report), one of the largest grocery retailers, recently posted third-quarter fiscal 2014 earnings of 69 cents a share that beat the Zacks Consensus Estimate of 61 cents, and surged 30.2% from 53 cents earned in the prior-year quarter aided by its Customer 1st strategy, increase in sales and strong fuel margins. The acquisition of Harris Teeter also supported the bottom-line. The better-than-expected results prompted management to raise its earnings guidance.

The Cincinnati-based Kroger now projects fiscal 2014 earnings between $3.32 and $3.36 per share, up from its earlier provided range of $3.22 to $3.28. The current Zacks Consensus Estimate for fiscal 2014 is $3.29 that could witness an uptrend in the coming days. Shares rose 3.4% during pre-market trading hours.

On a reported basis, including one-time items, the quarterly earnings came in at 73 cents, up significantly from 57 cents delivered in the year-ago period.

Total sales (including fuel center sales) grew 11.2% to $24,987 million from the prior-year quarter, and also came ahead of the Zacks Consensus Estimate of $24,847 million. Management stated that excluding fuel center sales, total 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 $18,929 million. Kroger now envisions identical supermarket sales (excluding fuel) growth of 4% to 5% for the fourth quarter.

Including fuel center sales, identical supermarket sales jumped 4.7% to $22,308 million. We believe that Kroger’s dominant position enables it to expand store base and boost market share.

Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth. However, Kroger is not immune to the tough economic environment. The intensifying price war among grocery stores to lure budget-constrained consumers may adversely impact Kroger’s sales and margins.

Operating income jumped 21.9% year-over-year to $651 million, whereas operating margin expanded 20 basis points to 2.6%.

Kroger, which competes with Target Corp. (TGT - Analyst Report), ended the quarter with cash of $264 million, total debt of $11,536 million, reflecting a debt-to-capitalization ratio of approximately 68.3%, and shareholders’ equity of $5,344 million. Net debt increased $3,368 million from the prior-year period due to Harris Teeter transaction and share buyback activity.

Trailing-twelve months’ net total debt to adjusted EBITDA ratio was 2.29 compared with 1.86 in the prior-year period. Management expects to attain net total debt to adjusted EBITDA ratio of 2.00 to 2.20 by mid-to-late of next fiscal year.

Total capital expenditures during the quarter aggregated $681 million. Management anticipates capital investments to come in at the lower end of $2.8 billion to $3 billion for fiscal 2014.

During the quarter, Kroger bought back 600,000 shares for an aggregate amount of $29 million. The company’s free cash flow generating ability has facilitated it to return over $1.8 billion to stakeholders via dividends and share repurchases in the last four quarters.

The company currently operates 2,631 supermarkets and multi-department stores in 34 states and the District of Columbia under approximately 24 local banners. We believe that the company’s strong corporate and national brands helped it gain customer loyalty.

Currently, Kroger’s shares maintain a Zacks Rank #2 (Buy). Other stocks better ranked stocks include Safeway Inc. (SWY - Analyst Report) and Aramark (ARMK - Snapshot Report) both sporting a Zacks Rank #1 (Strong Buy).