Restock Kroger Still on Track in Q2

Halfway through the second year of its transformation plan, The Kroger Co. says its digital investments to reposition the company for the future are continuing to pay off.

CEO Rodney McMullen says the grocer’s second quarter results announced on Thursday reflect the disciplined focus of the retailer’s three-year, $900 million Restock Kroger blueprint announced in 2017.

The Cincinnati-based grocery chain reported a 2.5% increase in same-store sales, excluding fuel, up from the corresponding period a year ago and beating estimates of 1.9% growth. These were the best same-store sales reported by Kroger since the start of Restock Kroger.

During the second period, Kroger reported slightly higher sales of $28.2 billion compared to $28 billion a year earlier. Digital sales, a key focus for the company, grew 31%. Profit declined to $297 million, missing forecasts. The company primarily blamed lower margins in pharmacy. 

Kroger also said the retailer’s Restock Kroger plan no longer expects to hit its target of $400 million in incremental profit by 2020.

But in an earnings call, McMullen stressed that the retailer’s “internal customer measures are improving even faster” than same-store sales and other growth metrics. “There is always a lag between improving the customer experience and when the customer will reward us,” he said.

Some other positive trends for Kroger during the second quarter included:

• Highest ever market share growth for Our Brands
• Kroger expanded its digital coverage area to reach 95% of customers. This means 95% of customers who shop Kroger in a brick-and-mortar store can also shop with Pickup or Delivery
• Pickup and Delivery sales growth continued to perform in the mid-30s during the quarter
• FIFO operating margin was stable in the supermarket business, excluding fuel and pharmacy
• Fifteen Kroger divisions had increasing supermarket same-store sales, without fuel, compared to the first quarter
• The company is on track to deliver $100 million in incremental operating profit through alternative profit stream growth

“We continue to make significant investments to redefine the grocery customer experience,” McMullen said. “We are building a platform of seamless experiences to serve customers anything they want, anytime they want, and anywhere they want. We know the seamless experience is essential to the customer experience both today and tomorrow, which is why we continue to invest heavily in our capabilities in this area.”

Shares

For the period ended Aug. 17, Kroger earned 44 cents per share. That was up 7% from the 41 cents it earned in the year-ago quarter and it beat estimates by the same margin. Kroger reiterated its full-year guidance of same-store sales growth of 2% to 2.25%. Kroger also reiterated its full-year guidance for adjusted earnings of $2.15 to $2.25 per share and operating profit of $2.9 billion to $3 billion.

Kroger shares have fallen 12% in the past six months, but they’ve climbed 22% since bottoming out in late July. Kroger’s stock was down 25 cents, or 1%, to $25.76 in mid-afternoon trading on Thursday.

Technology

Kroger is in the throes of a massive overhaul of its business model, investing in digital capabilities, technology and partnerships such as that with British retailer Ocado.

“We know Ocado’s value is not just its current capabilities, but also in how quickly the company is able to innovate to serve a rapidly developing online consumer market,” McMullen said.

Private label

During the second quarter, Kroger’s Our Brands sales grew 3.1%. Retail and unit share growth led to the highest second quarter share in Our Brands history. Kroger also introduced 203 new Our Brands items during the second quarter.

“Our customers’ favorite new items mirror key food and flavor trends we predicted,” McMullen said. “And those new items delivered more than $137 million in incremental sales during the second quarter, further bolstering our supermarket business.”

The company just this month said it is rolling out an extension this fall of its popular Simple Truth private brand, called Simple Truth Plant Based, which will include fresh meatless burger patties and grinds as well as plant-based cookie dough, pasta sauces, sausages, deli slices, dips and other items.

On Nov. 5 Kroger will host an investors conference in New York City where the grocer says it will detail its progress against the key metrics in the supermarket business and its momentum.

“Transformation is incredibly difficult,” McMullen said. “The Restock Kroger transformation journey sets the company up for long-term growth going forward. And the benefits we have seen thus far have helped Kroger in our transformation from grocery to growth company. We have the right overall strategy and framework for this business and look forward to telling you more about it in November.”

Kroger competitors Walmart and Target posted higher sales in their most recent quarters thanks to similar investments in digital and merchandising.

Employing nearly half a million associates who serve more than 11 million customers daily through a seamless digital shopping experience and 2,761 retail food stores under a variety of banners, Cincinnati-based Kroger is No. 2 on Progressive Grocer’s 2019 Super 50 list of the top grocers in the United States.