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Kroger Continues Digital Momentum as Sales Challenges Loom

Kroger fourth quarter 2021 results
Digitally engaged shoppers fueled identical store sales growth at the Kroger Co. in the fourth quarter.

The Kroger Co. experienced pandemic-fuel sales growth and market share gains during the fourth quarter but shared 2021 guidance that envisions identical store sales turning negative.

The anticipated decline isn’t unexpected given the dramatic sales growth Kroger and other retailers experienced throughout 2020. Identical store sales at Kroger grew 10.6%, excluding fuel, during the reporting period ended Jan. 30, with the key driver of growth being digital sales, which advanced 118%. Total company sales during the quarter totaled $30.7 billion and increased 10.7% if fuel and dispositions are excluded. Full year identical sales increased 14.1% and total sales rose to a record $132.5 billion from $122.3 the prior year, making for a 14.2% gain, excluding fuel and dispositions.

"Kroger continued to grow market share during the quarter. Our ability to meet our customers' evolving needs is a testament to our deep competitive moats, disciplined investments in our increasingly robust digital capabilities, as well as our associates' relentless focus on our customers,” said Rodney McMullen, Kroger chairman and CEO. “We finished fiscal year 2020 with strong sales and earnings, as heightened demand for fresh, convenient food and meal solutions across modalities, including in store, pick up and home delivery, continued throughout the fourth quarter.”

The company reported an earnings per share decline of 10 cents, versus a prior year profits of 40 cents per share, due to a nearly $1 billion negative impact associated with a pre-tax charge related to United Food and Commercial Workers International (UFCW) pension commitments and other items.

Kroger’s profitability was also affected by price investments, COVID-19 related expenses and associate investments. For example, Kroger disclosed that wage investments have pushed its average hourly wage to $15.50 an hour with the average hourly rate exceeding $20 if benefits are factored in.

The investments are expected to pay off in 2021, but sales comparisons against the prior year will be challenging for Kroger, as well as other retailers facing difficult comparison. For example, Kroger is forecasting its full year identical sales will decline between 3% and 5%, however, CFO Gary Millerchip is emphasizing the importance of taking a multi-year approach, what financial executives refer to as “stacked,” in which the 2021 performance is combined with 2020 to even out the unprecedented spike from last year. Such an approach, which is becoming common among retailers, is seen as offering a clearer view of the underlying performance of the business.

"As a result of strong execution of our strategy, enabled by continued investments in our customers and associates, we are accelerating the momentum in our business,” Millerchip said. “Looking ahead to 2021, evaluating our performance using the two-year period of 2020 and 2021 more accurately measures this underlying momentum. We expect our two-year identical sales stack to be in the range of 9% to 11%.”

The company also expects its adjusted earnings per share and adjusted operating profit to have compounded annual growth rates of between 12% and 16% and 5.4% and 8.5%, respectively, which Millerchip said will result in total shareholder rates of return significantly above a previously communicated target of 8-11%.

"Our 2021 guidance contemplates continued investments in associates and customers plus ongoing COVID-19 related costs, balanced with continued execution of cost savings initiatives and growth in our alternative profit businesses,” Millerchip said.

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