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Kroger Same-store Sales Squeaker in Q3

The Kroger Co. continues to grapple with deflation as the nation’s largest traditional grocer nosed its way over the line into its 52nd consecutive quarter of same-store sales growth in the third quarter of its 2016 fiscal year.

The Cincinnati-based retailer reported identical-supermarket sales growth, without fuel, of 0.1 percent in Q3, which ended Nov 5.

Total sales increased 5.9 percent to $26.6 billion in Q3, compared wtih $25.1 billion for the same period last year; excluding fuel, sales grew 7.1 percent. Total supermarket sales, excluding fuel and Roundy's, increased 1.6 percent in Q3, compared with the year-ago period..  

Kroger reported Q3 net earnings of $391 million, or 41 cents per diluted share, versus $428 million, or 43 cents, a year ago.

Committed to the Long Term

"I am proud of our associates for continuing to connect with our customers in a difficult operating environment,” said Kroger Chairman and CEO Rodney McMullen. “Deflation persisted as we expected during the quarter. We are firmly focused on our long-term strategy of improving our connection with customers and associates, and continue working on process changes to lower costs. We don't change our strategy based on quarterly swings in results. We remain committed to delivering on our long-term earning- per-share growth-rate guidance."

Gross margin was 22.2 percent of sales for Q3. Excluding fuel, Roundy's and LIFO, gross margin decreased five basis points from the same period last year. Kroger recorded an $8 million LIFO credit during Q3, compared with a $9 million LIFO charge in the same quarter last year.

Total operating expenses – excluding fuel, Roundy's and an $80 million contribution to the UFCW Consolidated Pension Plan in Q3 2015 – increased 19 basis points as a percent of sales compared with the prior year, of which 15 basis points were related to depreciation due to increases in the capital program.

“A silver lining of deflationary environments is that it reveals to us how we can run our business better by shining a light on areas we can improve,” McMullen said. “It is really tough when you are in it, but we’ll be in a position to benefit from changes we’re making today once we’re out of this cycle.”

Kroger EVP and CFO Mike Schlotman noted that same-store sales came in at the low end of expectations for the quarter. “Deflation has not only persisted but has increased, with overall deflation excluding pharmacy growing from 1.3 percent in the second quarter to 1.5 percent in the third quarter,” Schlotman said, adding that pharmacy inflation declined 130 basis points to 3.3 percent during Q3.. “Over the last four quarters, we have relocated or expanded 49 strong-performing stores. This takes them out of our identical-supermarket sales calculation. Further, we have opened 42 new stores over the same time frame. Both of these create a headwind to identical food-store sales. By way of comparison, last year there were 19 new stores opened that affected nearby stores.”

Adjusted Guidance

Kroger has narrowed its net earnings guidance range to $2.03 to $2.08 per diluted share for 2016; the previous guidance range was $2.03 to $2.13. For Q4, Kroger expects slightly positive identical-supermarket sales growth, excluding fuel. The company expects capital investments of $3.6 billion to $3.9 billion for the year, excluding mergers, acquisitions and purchases of leased facilities.

“We are completing our business plan process for 2017 now and will provide specific guidance in March,” Schlotman said. “We anticipate both positive identical-supermarket sales and net earnings per diluted share growth, excluding the 53rd week.”

Net earnings growth will likely be below the low end of the company's 8 percent-to-11 percent net earnings per diluted share long-term growth rate guidance.

Kroger expects the operating environment in the first half of 2017 to be similar to today, with improvement anticipated in the second half of 2017 as the company cycles the current environment.

“Looking at the broader economy and customer shopping behavior, what we’re seeing is mixed,” McMullen said. “Typically, our data shows our customers’ economic concerns mirror what they see in headlines. Consumer confidence retreated during the quarter, with customers telling us they expect the economy to get worse in the next three months.”

Kroger continues to enjoy success with natural, organic, and health-and-wellness products, McMullen said, noting “strong double-digit growth” for the grocer's Simple Truth brand.

“We’ll continue to accelerate our adoption of technology to deliver additional value, to provide convenience for our customers and take costs out,” McMullen said. “We have a unique opportunity for explosive growth in the $1.5 trillion U.S. food market, and our best days are still ahead of us.”

Kroger operates 2,796 retail food stores under a variety of local banner names in 35 states and the District of Columbia.


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