What Kroger Management Wants You to Know

The nation’s biggest retailers are racing to adjust to shifting demand toward e-commerce shopping options. Kroger‘s (NYSE: KR) business has been hit hard by this change, which has contributed to a growth slowdown and reduced profits as the supermarket chain invests aggressively in building out its online infrastructure.

Executives have been telling investors that this spending will lay the groundwork for improved results over the long term, and recently Kroger gave a few hints about how that recovery process might play out. CEO Rodney McMullen and his executive team held a conference call with analysts to put its latest results into perspective.

Here are a few highlights from that chat.

Image source: Getty Images.

Solid sales gains

We’re pleased with our results. Several departments outperformed the company in the first quarter, most notably meat, seafood, and our floral department. Natural foods continued to generate strong double-digit growth in the first quarter. And, during the quarter, we saw growth in households and loyal households as well as unit growth.
— Chief Financial Officer Michael Schlotman

Kroger’s 1.4% improvement in comparable-store sales marked a slight decrease from the prior quarter’s results. But, while that was the first time in over a year that sales gains didn’t accelerate, the growth still met management’s target.

Data source: Kroger. Sales growth by quarter. Chart by author.

The comps growth came with modest volume and market share expansion, too, as the company continued to hold its own against key rivals like Walmart (NYSE: WMT). Kroger has chipped away at Walmart’s grocery position for most of the past decade, mainly thanks to the popularity of in-store brands like Simple Truth, and that streak isn’t in danger of ending in 2018.

Shifting online

We believe the future of retail will include both physical and digital customer experiences. Everything we are doing today will enhance our ability to provide everyone in America with convenience of shopping for anything, any time, anywhere.
— McMullen

The digital sales channel was a major bright spot in this report, with e-commerce revenue rising 66%. That result blew past Walmart’s comparable metric, although Kroger is growing from a much smaller base today.

Executives credited their expanding delivery initiatives that now cover 75% of Kroger’s customer base. Just as Walmart has, the retailer has noticed that shoppers who purchase online tend to spend more and remain more loyal, and so it’s worth aggressively targeting these customers. Kroger is doing so through a mix of organic changes and acquisitions like the recent Home Chef merger and new Ocado partnership.

Steady profitability

We had one of the best cost control quarters in a long time due to implementing process changes.
— Schlotman

After adjusting for one-time charges, Kroger’s profitability declined slightly to continue a trend that’s been hurt earnings for almost two years now. The retailer kept up its price-cutting strategy while spending more on wages. Executives also invested in e-commerce improvements and redesigned store layouts.

These cost headwinds were mostly offset by cuts in other areas and a range of small changes that added up to significant savings. Management highlighted a few of these, including successful efforts to reduce theft and boost energy efficiency. “We won’t leave a penny on the table as we seek to reinvest savings to grow our business,” Schlotman explained.

Updated guidance

We expect identical sales growth [in 2018], excluding fuel, to range from 2% to 2.5% in 2018. This reflects our updated definition of identical sales and is supported by an expectation for identical supermarket sales that is the same as our original guidance for the year.
— Schlotman

Kroger is now including digital sales in its core revenue growth metric, which brings it in line with peers like Walmart and Target. The company still believes its expansion pace will roughly double this year, and the new reporting methodology is just a reflection of the significant — and growing — role that e-commerce is playing in its rebound efforts.

Overall, the results point to more modest growth ahead for Kroger, but no clear signs as to when it might return to its prior 10% annual earnings growth pace.

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