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Kroger's Flat Q2 Punctuated By Growth In Digital Sales

Grocer has also agreed to pay $1.4B for nationwide opioid settlement framework
Emily Crowe, Progressive Grocer
Kroger has had a busy Q2, including making plans to divest hundreds of its stores to C&S Wholesale.

While Kroger's second quarter brought relatively flat financial results, the grocer has been busy behind the scenes. Kroger and Albertsons Cos. confirmed that they have entered into a definitive agreement with C&S Wholesale Grocers to sell select stores, banners and other assets, and Kroger also shared details behind its nationwide opioid settlement framework

As for the quarter ended Aug. 12, Kroger's total company sales were $33.9 billion, compared to $34.6 billion for the same period last year. Excluding fuel, that marks a 1.1% increase in sales over the previous year. Gross margin was 21.8% of sales during the reporting period, and operating loss was $479 million. The company also saw adjusted FIFO operating profit of $989 million and adjusted EPS of $0.96.

"The strength and diversity of Kroger's business model is delivering consistent results in what remains a challenged environment,” said CEO Rodney McMullen. “By investing in price and providing more personalized offers, we are helping customers stretch their budgets and manage the ongoing effects of reduced government benefits, inflation and higher interest rates. Kroger is funding these investments by collaborating with vendors to deliver exceptional value, managing costs and growing alternative profit businesses.”

Continued McMullen: "We are growing households as our associates are providing a full, fresh and friendly shopping experience across our seamless ecosystem. While we expect the environment to remain challenged going forward, we are committed to delivering exceptional value for our customers and investing in our associates, and by doing so, we expect to generate attractive returns for shareholders."   

[Read more: "EXCLUSIVE: Kroger Builds a Workforce for the Future of Grocery"]

The quarter did bring a 12% lift in digital sales, as well as an increase in total and loyal customer households. Delivery sales increased by 24% over last year, driven by Kroger's delivery solutions, including Kroger Boost and its customer fulfillment centers.

Kroger reaffirmed its full-year 2023 guidance, to include identical sales without fuel of 1.0%-2.0%, with underlying growth of 2.5%-3.5% after adjusting for the effect of Express Scripts. Adjusted net earnings per diluted share of $4.45-$4.60 are expected, including an estimated benefit from the 53rd week of approximately $0.15.

"Kroger's second quarter results demonstrate the resiliency of our value creation model. While industry-wide disinflation continues to impact food at home sales, our team is doing an excellent job managing the effect on our business," said CFO Gary Millerchip. "Looking forward, we believe inflation will continue to decelerate and the environment will remain challenging for consumers. We therefore expect identical sales without fuel will be at the low end of our full-year guidance range and slightly negative in the second half of the year. This outlook includes an approximately 150 basis points negative impact due to the termination of our agreement with Express Scripts."

The second quarter also brought several milestones for the grocer, including the 10th anniversary of its Home Chef brand and its new commitment to donate 10 billion meals as a combined company with Albertsons by 2030.

Additionally, Kroger shared that it has reached an agreement in principle with plaintiffs to settle the majority of opioid claims that have been or could be brought against it. Along with the execution of certain non-monetary conditions that are still in discussion, Kroger has agreed to pay up to $1.2 billion to states and subdivisions, as well as $36 million to Native American tribes in funding for abatement efforts. Both of those sums will be paid over 11 years in equal installments, and approximately $177 million will be paid over six years to cover attorneys’ fees and costs.

The total $1.4 billion charge has been recognized in the grocer’s Q2 financial reporting, which will negatively impact earnings per diluted share of $1.54 on a GAAP basis.

Serving 11 million customers daily through a digital shopping experience and retail food stores under a variety of banner names, Cincinnati-based Kroger is No. 4 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America. Boise, Idaho-based Albertsons operates more than 2,200 retail stores in 34 states. The company is No. 9 on The PG 100. PG also named both companies to its Retailers of the Century list.

Founded in 1918 as a supplier to independent grocery stores, Keene, N.H.-based C&S services customers of all sizes, supplying more than 7,500 independent supermarkets, chain stores, military bases and institutions with 100,000-plus products, in addition to operating corporate stores. The company is No. 17 on The PG 100.

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